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Federal Document Clearing House Congressional Testimony
March 7, 2002 Thursday
SECTION: CAPITOL HILL HEARING TESTIMONY

LENGTH: 4356 words

COMMITTEE: HOUSE APPROPRIATIONS

HEADLINE: FISCAL 2003 APPROPRIATIONS

TESTIMONY-BY: EDUARDO AGUIRRE, VICE CHAIRMAN

AFFILIATION: EXPORT-IMPORT BANK OF THE UNITED STATES

BODY:
EDUARDO AGUIRRE VICE CHAIRMAN EXPORT-IMPORT BANK OF THE UNITED STATES BEFORE THE HOUSE APPROPRIATIONS COMMITTEE SUBCOMMITTEE ON FOREIGN OPERATIONS, EXPORT FINANCING, AND RELATED PROGRAMS

MARCH 7, 2002

Chairman Kolbe, Congresswoman Lowey, Members of the Subcommittee:

I am here today representing John Robson, the President and Chairman of the Export-Import Bank, and all Ex-Im Bank employees, in support of the Administration's Budget request for fiscal year 2003. I may be an old banker, but I am new to Ex-Im Bank and the federal government. It may seem sometimes that the public and private sectors do not match perfectly. But I am finding that many things about my background in the commercial banking sector match the way Ex-Im Bank does business. I have always wanted to keep my customers in mind and to serve them with a winning team. The direct customers of our services are the exporters as well as those who are employed producing the exports. In addition, we have a winning team of employees at Ex-Im Bank who are dedicated to supporting US exports and US jobs. I believe that keeping those elements in harmony leads to success, and I believe in bringing successful business strategies to government.

Success also requires facing challenges squarely and realistically. The country was experiencing an economic downturn prior to September 11, and the events of September 11, of course, have strongly reinforced the negative effect on investor confidence. According to the IMF, 2001 marked the lowest level of net private capital flows - including bonds, equity and loans - to emerging markets since the early 1990s. This occurred during the same year that the growth rate in world trade slowed in volume terms to only 1 % in 2001 - compared with about 13% in 2000.

Now more than ever, one of Ex-Im Bank's jobs in this changed world is to take the lead in the US commercial effort to penetrate risky emerging markets. We find opportunities, take risks where there is a "reasonable assurance of repayment" as mandated by our charter, and try to draw the private sector into exporting wherever we can. We also step up in times of crisis -- as we did during the 1997-98 global financial crisis, and as we did this past fall in supporting the airline industry in the wake of the September 11 attacks. In so doing, not only do we increase US exports, we also foster stability and economic growth at home and abroad.

Today, I want to share with the Subcommittee some of the issues that have impacted Ex-Im Bank operations. This year the Office of Management and Budget has made major revisions in the method used to establish the budget cost of international credits for all international financing agencies throughout the federal government, which I will discuss below. I want to tell you about progress we have made regarding small business, the special challenges we face in Sub-Saharan Africa, and Ex-Im Bank's role in the greatly changed environment following September 11.

But first, I want to review what remains the same for Ex-Im Bank - our basic operating principles. We are in business to support US jobs, the well-paying jobs made possible by exporting. We do this by supporting the exports of US goods and services through direct loans, loan guarantees, and insurance. These are transactions that would not go forward without us, and they take on particular importance during times of international economic contraction, as we are currently experiencing. They come from large and small businesses in almost every state and most Congressional districts. As a matter of fact, most of our transactions, over 86%, are with small businesses.

Ex-Im Bank meets the support provided by the export credit agencies of our major competitors in Europe, as well as the Canadians and the Japanese. We also will support exports that offer a reasonable assurance of repayment that the private sector finds too risky because of the market involved and/or the length of time required for repayment. Finally, our charter requires that we not compete with the private sector. As part of our continuing effort to make sure that we are following this mandate and as promised to this Subcommittee last year by Chairman Robson, we are instituting a series of "clinical trials" to develop new methods to increase efficiency, offer new products and/or reduce costs to US taxpayers. I will elaborate on this below.

There are other issues that I will take up in this testimony. We will need to examine regions, such as Sub-Saharan Africa, that present special challenges that we are endeavoring to meet. And I want to discuss Ex-Im Bank's role in the greatly changed environment following the tragedy of September 11.

PROGRAM BUDGET

Mr. Chairman, the request for our "program budget," or in more technical terms "credit subsidy," is $541.4 million. We estimate that we will have an additional $90 million available to us in cancellations of transactions approved in previous fiscal years. This total of $631.4 million, combined with the fees we charge, will support an estimated $11.5 billion in Ex-Im Bank authorizations, which will in turn support about $15 billion in US exports. Ex-In Bank has projected a FY 2003 authorization level of $11.5 billion based on a careful analysis of potential demand for the Bank's programs.

The credit subsidy is an estimate of the default costs of Ex-Im Bank transactions. It is kept in reserve to cover any such losses. To compare to the current fiscal year, we have $1.007 billion available, $727.3 in appropriations, $189.8 in carryover from FY 2001, and $90 million in expected cancellations. We estimate that this will support $10.4 billion in authorizations, translating into about $14 billion in exports.

This brings up a very obvious and important issue. Our request of $541.4 million is a 25.6% reduction from the FY 2002 enacted amount of $727.3 million. The total amount available to Ex-Im Bank for 2003, $631.4 million, is 37% less than the amount for FY 2002, $1.007 billion. Yet, we estimate that we will be able to increase our authorizations from $10.4 billion to $11.5 billion, or 10.6%. How can we be requesting less money, which in turn will yield such increases?

Changes in Budget Methodology

The answer to this lies in changes the Office of Management and Budget has made to the method used to establish the budget cost of international loans. These changes apply not just to the Export-Import Bank, but to all international financing agencies throughout the federal government. Though this is a very complex methodology, I believe I can briefly lay out the basics.

Since the passage of the Federal Credit Reform Act of 1990, the default costs of international loans have been estimated by the Inter-Agency Country Risk Assessment System, or "ICRAS." Until the FY 2003 budget, the ICRAS methodology measured the default cost implicit in the interest rates charged by private investors to foreign debtors, using the difference between these interest rates and the US Treasury rate as a measure of risk. This difference, or "spread," is viewed as the amount of additional interest that private investors require as compensation in case the borrower defaults. Previously, ICRAS based default projections for federal loans and loan guarantees to foreign debtors on these spreads, attributing them entirely to default risk.

However, in recent years there has been mounting evidence that the interest rate spreads are made up of more than just default risk. Other factors include systematic risk, the preferential treatment of the Treasury bills, which are exempt from state and local taxes, the greater liquidity of Treasuries, and the prepayment risk associated with callable bonds. Beginning with the FY 2003 budget, a new OMB method will link budget costs to the historical default experience of debt with equivalent private ratings. This method will continue to use the spread as a signal of default risk. As a result, the method will retain its most appealing feature: use of current information from financial markets, while relating default estimates to their long-term historical averages.

ADMINISTRATIVE BUDGET

Mr. Chairman, we are requesting $70.3 million for our administrative budget for FY 2003. This includes for the first time $1.9 million in "pass through" payments for retirement and health payments which used to be included in "central mandatory accounts." In other words, this portion does not represent a "real" increase in the federal budget, but is simply a transfer from one account to another. However, I want to emphasize that this amount will have to be paid, no matter what the final appropriation figure for our administrative budget.

Excluding, then, the $1.9 million from the $70.3 million, we are requesting $68.4 million in administrative budget for FY 2003. That is the "apples to apples" figure used to compare with the FY 2002 level of $63 million.

Mr. Chairman, roughly 90% of this request is inflexible costs for the running of Ex-Im Bank - rent, heat, lights, salaries, etc. The rest, especially the increment of $5.4 million, which is the increase of the FY 2003 request over the FY 2002 enacted level, can make the difference as to how well we are able to serve the needs of US exporters and how efficiently we run as a bank. We have to be able to compete with the export credit agencies of our competing countries, not just in matching their offers, but in the speed and efficiency with which we are able to evaluate and process applications. If we are going to keep up with them, and if we are going to efficiently process the thousands of applications we receive yearly, most of which are for small business transactions in our Insurance and Working Capital Divisions, then we have to continue to modernize our technology systems. A lot of good work has already been done with the funds appropriated to us, but we have a distance to go.

ADMINISTRATIVE BUDGET SMALL BUSINESS AND INFORMATION TECHNOLOGY

The Bank has already embarked on a long-term information technology strategy. But there are areas we still need to work on. We are seeking to increase Bank and customer efficiency through improvements in technology.

Customer Relationship/Tracking System: Given the exponential growth in the development of Ex-Im Bank's small business customer database, the current customer tracking system, ACT, is no longer capable of handling the volume or the additional functionality needed to support the business and business development processes within Ex-Im Bank, especially the Insurance Division's future automated system.

Insurance Automation Project: The development and implementation of a fully automated, business re-engineered and web-enabled insurance system was begun the latter part of FY 2001 and will continue through FY 2003. This system will support the program that provides Ex-Im Bank's most extensive support to the US small business community. Accordingly, it is viewed as a major investment in Ex-Im Bank's ability to meet the financing needs of a growing small business exporting community in terms of access, distribution, and enhanced customer service, providing essential productivity gains and cost savings over time, and providing Ex- Im Bank with the ability to effectively manage and monitor worldwide exposure and associated risks on a real-time basis.

Modernization of computer systems, such as the insurance system, can both exponentially leverage staff resources and provide for greater efficiencies in the way we serve our customers, especially small businesses, while maximizing value to the taxpayer through real-time risk management capabilities. For example, to make basic, routine credit decisions staff must currently use five different computer systems, manually entering information in each system, taking up to two hours to compile the necessary information. The system can be modernized to allow for on-line submission of information, thereby eliminating redundant manual data entry. In addition, the system could also be modernized so that staff simply hit a button to access a reporting capability to receive necessary information, saving valuable time rather than having to access multiple systems to acquire and assemble needed information. With these changes, Ex- Im Bank staff can be working with small business exporters that need specialized assistance, participate in outreach efforts, and manage and monitor portfolio risk rather than manually doing work that can be automated. On the customer end, Ex-Im Bank is working to develop on-line application submissions capability. As ease of use improves for the applicant, it is imperative for Ex-Im Bank to be in a position to effectively meet an increased demand for service by adapting more efficient transaction processing with automated support.

Many private sector corporations and financial institutions have already implemented automated business decision models or are in the process of doing so. Improvements in productivity, containment of costs, and improved decision-making capabilities enable them to run their businesses more efficiently and effectively. Ex-Im Bank also needs to deploy technology to gain similar benefits and devote more staff time and resources to improved risk management, and customer service and outreach, particularly towards the small business exporting community.

But to move in this direction, Ex-Im Bank first needs the funding to purchase licenses and customize these systems, which cost millions of dollars. With approximately 90% of the administrative budget set in fixed costs, every chip off of the increase dramatically impacts the Ex-Im Bank's ability to modernize and increase efficiencies on user and processing sides.

Working Capital Service Response: This project was begun in FY 2001 and is designed to enhance customer service turnaround by providing on-line submissions, including fee payments. However, several key components of the original design and statement of work have not been completed as part of the final system due to financial constraints. These components include e-signature and e- payment capabilities. While included in the Working Capital project, Ex-Im Bank envisions that these modules would be and could be integrated across multiple platforms within the Bank in compliance with federal regulations. Additional funding will be needed in order to develop and integrate within Ex-Im Bank for full functionality of the Working Capital Program and other programs, including the Insurance Automation Project which I discussed above.

Other draws on Ex-Im Bank's administrative budget include educational seminars for small business. In FY 2002 the Bank will conduct approximately 60 seminars throughout the US targeted to small business exporters and approximately 30 trade shows of key industries. As part of our continued outreach efforts, we want to increase these numbers in FY 2003. In-person staff missions to high-risk markets, in order to assess the economic conditions of higher-risk markets, particularly Sub-Saharan Africa, Pakistan and the Middle East, will also be crucial to the Bank's role in FY 2003.

The administrative budget also supports the Bank's ability to continue its highly successful targeted direct mail campaign. This campaign allows the Bank to cost effectively contact every exporting company in the United States and is the primary marketing tool to drive new business. Every week the Bank receives 50-60 responses for further information, to which we respond with a direct contact.

Our efforts to support US small business exporters are continuing. I have met recently with Hector Barreto, the Administrator of the Small Business Administration, to discuss issues such as coordinating our programs to avoid duplication and better serve the small and medium-sized businesses. Vanessa Weaver, a member of our Board of Directors, leads our efforts to reach out to the small business community.

Over the years, over 86% of our transactions have directly benefited small businesses, consuming 18% to 20% of our authorization totals by export value. On the insurance side, we expect that figure to hold constant at about $2.5 billion, given the technology we are currently using. We predict, however, that our working capital program will grow. In FY 2001, working capital authorizations totaled $660 million. The estimate for FY 2002 is $750 million and for FY 2003 about $800 million.

I need to emphasize, however, that especially for insurance, we are dependent on the funding we are able to devote to our automation project. These smaller transactions need to be handled quickly and accurately, and the only way to do that is with the proper technology. Increased funding in this area, especially in outreach and application processing, would allow us to greatly expand our insurance business, which is focused almost exclusively on the small business exporting community. I emphasize once again here the importance of our request for our administrative budget in achieving these goals.

INCREASING EX-IM BANK'S EFFICIENCY

To follow up on testimony Chairman Robson gave to this Subcommittee last year, and to respond to the needs of the export finance market, Ex-Im Bank recently started developing new, innovative and adaptable programs. We are discussing new methods to increase efficiency, offer new products, and/or reduce costs to the US taxpayer. Ex-Im Bank, working with its partners in the exporting community and Congress, is targeting, implementing, and evaluating these clinical trials in 2002. The information gained will be used to shape our programs in the following year. Though the details have yet to be worked out, discussions are being held in such general areas as war risk insurance and sharing more risk with the private markets. The goal will be to deliver the best value possible for taxpayer dollars.

AIRCRAFT FINANCING

During FY 2001, Ex-Im Bank authorized loans and guarantees totaling $2.6 billion in support of the export of 53 aircraft valued at $3.1 billion to twelve airlines located in 11 different countries.

Due to the current operational and financial difficulties confronting the international airline industry and the reduction in availability in financing from the aircraft finance market, Ex- Im Bank anticipates an increase in demand for its aircraft finance program. Ex-lm Bank's current estimates indicate that Ex- Im Bank could support the export of between $5.5 billion and $6.0 billion of US manufactured aircraft during FY 2002, thereby supporting the US aircraft manufacturing industry and the thousands of jobs which depend upon it.

The terrorist attacks on September 11 impacted the entire international aviation industry and not just the US airline industry. Although not to the same extent as in the US, the terrorist attacks depressed air travel in many parts of the world, thereby reducing revenues for many of Ex-Im Bank's airline customers. In addition, the terrorist attacks resulted in significant increases in security and insurance costs for many of Ex-lm Bank's airline customers and had the possibility of severely disrupting the international air transport system.

Airlines throughout the world are generally required to maintain adequate levels of third party liability insurance (including third party war risk liability insurance) in order to operate their aircraft. However, in the initial aftermath of September 11, the world's commercial aviation insurers canceled all airlines' third party war risk liability insurance. Although the commercial aviation insurers later agreed to once again make this type of insurance available, it was only for reduced amounts of coverage and/or at significantly higher premiums. As a result, on a temporary basis, many governments (including the United States) decided to make third party war risk insurance available to their own airlines and/or indemnify them for any losses that they may incur.

In order to do what it could to ensure that the international air transport did not "grind to a halt," Ex-Im Bank decided to refrain from immediately enforcing its rights under its financing documents with respect to airlines that may not be in compliance with the third party war risk liability insurance requirements, thereby giving Ex-Im Bank's airline customers and the international aviation industry the time necessary to develop a longer term solution to this problem.

Although some Ex-lm Bank supported airlines decided to purchase the insurance commercially, a significant number of airlines had to rely on their respective governments to provide insurance indemnities to supplement minimal levels of commercial third party war risk liability insurance.

Due to the intrinsic global nature of the international airline industry, Ex-Im Bank believes a global solution needs to be found to the aviation third party war risk liability insurance problems.

Accordingly, Ex-In Bank has been working with other US government agencies, international aviation associations such as the International Civil Aviation Organization, the International Air Transport Association and the European export credit agencies to determine how a longer term, uniform approach to aviation insurance can be implemented. Ex-In Bank's decision to refrain from exercising its rights with respect to third party war liability insurance extends through March 31, 2002. Ex-Im Bank is developing innovative financing transactions to respond to commercial markets pulling back from financing aircraft exports. It is our goal that these transactions will be priced to be budget neutral and reflective of our role relative to the private market.

ENVIRONMENTAL PROGRAM

During the last fiscal year, Ex-Im Bank supported $462 million of environmentally beneficial transactions, helping US firms win deals in diverse places, including South Africa and Lebanon. Dan Renberg is the Board Member with the responsibility of leading our environmental outreach efforts.

In order to meet our statutory mandate of supporting environmentally beneficial exports, we are aggressively reaching out to exporters and foreign buyers, including joining with the US Department of Commerce at a series of Environmental Exports Seminars around the country and using targeted direct mail.

Recognizing our statutory mandate to assist the US renewable energy industry, Ex-Im Bank is establishing a broad-based advisory committee in the next few weeks to give us suggestions as to how to increase our responsiveness to the needs of the renewable energy sectors, including solar, geothermal, wind, and biomass. We have consulted extensively with other federal agencies, energy companies, and environmental non-governmental organizations to assemble this panel of technical experts in the renewable energy export marketplace.

We are making a difference for companies such as Environmental Dynamics in Columbia, Missouri, our Small Business Exporter of the Year in 2001. This company started using our environmental export insurance policy in 1997, and in the past four years its export growth has averaged more than 80% each year. The company has increased the number of its employees from 38 to 63.

SUB-SAHARAN AFRICA

In 1998, Ex-Im Bank established the Africa Task Force to work in coordination with our Sub-Saharan Africa Advisory Committee to facilitate our business in an area rich in potential but facing stiff economic challenges. Over the past four years, we feel we have built a foundation of exporter, borrower, and lender relations which will serve us well in the future. We are currently open in 47 Sub-Saharan Africa markets. J. Joseph Grandmaison, a member of our Board of Directors, has been named to lead Ex-Im Bank's outreach efforts to expand support of US exports to Africa. He is just returning from a mission to the region which included visits to Ethiopia, Kenya, and Nigeria.

This is not to say that we do not recognize the challenges presented by some African markets. Ghana, which accounted for over half of the Bank's transactions in the region in 2000, has suffered some recent reverses. While recent world macro-economic conditions hit poor countries proportionately harder than other countries, in FY 2001 the Bank still authorized 90 transactions totaling $85 million to 16 Sub-Saharan African countries. With further visits by board members and staff as part of our continuing outreach program, we hope to improve on these numbers in FY 2003.

AFGHANISTAN AND PAKISTAN

On January 28, during the visit of Chairman Hamid Karzai to Washington, President Bush and Chairman Karzai announced that Ex- Im Bank, along with OPIC and TDA, would conduct an investment assessment mission to Afghanistan to help identify investment needs and opportunities for US private sector participation in reconstruction. I have just returned from a trip to Pakistan, where I - along with Mr. Ross Connelly of OPIC and Mr. Carl Kress of TDA - spoke with President Musharraf, members of his Cabinet, and representatives from the Pakistani business and government sectors about how best to develop business relationships with Pakistan and the possibilities of structuring support for Afghan reconstruction through Pakistan. Although we were unable to travel into Afghanistan proper, I feel that the inter-agency group gained a greater understanding of the challenges and opportunities present in the region. This understanding will serve us well as we continue discussions on reconstruction here in the United States.

CLOSING

We are grateful for the efforts of this Subcommittee last year to extend our charter as part of the FY 2002 appropriations process. We realize that the March 31 extension deadline is approaching, and I want to assure you that we are making progress.

I will be happy to try to answer any questions you may have.



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