Consultation outcome

Foreign Content Policy: consultation document

Published 3 April 2019

1. Consultation Document

1.1. Governments provide officially supported export credits through an Export Credit Agency (ECA) in support of national exporters pursuing overseas contracts. Many countries in the world have an ECA. Their structures and mandates vary widely, but all use a combination of finance, guarantees and insurance (often in partnership with banks and financial institutions) to support exporters and therefore jobs.

1.2. UK Export Finance (UKEF), the operating name of the Export Credits Guarantee Department (ECGD), is the UK’s ECA. It is strategically and operationally aligned with the Department for International Trade (DIT) - reporting to the same Ministers - but remains a separate ministerial department. UKEF is also subject to several international agreements (including the Organisation for Economic Co-operation and Development (OECD) Arrangement on Officially Supported Export Credits and those emanating from the EU) and operates under the Consent of HM Treasury. UKEF’s mission is to ensure that no viable UK export fails for lack of finance or insurance, while operating at no net cost to the taxpayer.

1.3. UKEF helps UK companies of all sizes and in all sectors export by enabling them to:

• 1.3.1. Win business; by providing attractive financing terms to their buyers

• 1.3.2. Perform contracts; by supporting bonds and working capital loans

• 1.3.3. Get paid; by insuring against buyer default

1.4. UKEF also provides insurance to UK investors investing in enterprises overseas against loss due to the occurrence of political risks such as war or expropriation. In UKEF’s provision of insurance of this type under the Overseas Investment Insurance product, Foreign Content policy does not apply^{[footnote 1]}.

2. Introduction

2.1. UK Export Finance wishes to consult on proposed changes to its Foreign Content policy, which are set out in section 5 below. The proposed changes take into account three developments (more detail on these developments are outlined in Annex A):

• 2.1.1. The first is UKEF’s commitment in the Government’s Export Strategy to review its products and policies to ensure they reflect the full breadth of its capabilities and the needs of business.

• 2.1.2. The second is the emergence of increasingly globalised supply chains and the responses of other ECAs to this trend.

• 2.1.3. The third is amendments to the Export and Investment Guarantees Act (EIGA) that widen the ability of UKEF to support the exporting activities of firms carrying on business in the UK, those in exporting supply-chains or aspiring exporters.

2.2. Annex B includes a definition of Foreign Content and other relevant terms.

2.3. Annex C includes a summary of current Foreign Content policy (emanating from the Government Response to a public consultation in 2007).

3. Scope

3.1. The Department is not consulting upon the already established principle that it can support a contract where there is up to 80% Foreign Content for contracts consisting of a traditional one-buyer / one-supplier / one-contract model. The reasons for this requirement, as set out in the 2007 Consultation Response, remain valid (Annex C). This policy will be referred to in the remainder of this document as Principle One:

in all credit contracts, the maximum level of support for all Foreign Content will be 80% of the contract value where ECGD risk capacity is available, thus requiring a minimum 20% UK content.

3.2. Local Content rules, stating that ECAs cannot support local costs that exceed 30% of the Export Contract Value are governed at an international level by the OECD Agreement on Officially Supported Export Credits (the “Arrangement”) and are therefore out of the scope of this Consultation.

3.3. The proposed revised policy does not cover Airbus transactions which are subject to separate arrangements between the UK and the relevant EU ECAs.

4. Background

4.1. Under the Export and Investment Guarantees Act 1991 (EIGA) as amended the Secretary of State (SoS) may make arrangements that the SoS:

considers are conducive to supporting or developing (whether directly or indirectly) supplies or potential supplies by persons carrying on business in the United Kingdom of goods, services or intangible assets (including intellectual property) to persons carrying on business outside the United Kingdom.

4.2. The Small Business, Enterprise and Employment Act 2015 enables UKEF to assist and support firms carrying on business in the UK that are, or wish to become involved, in exporting supply chains. It also enables UKEF to take a more flexible approach when supporting UK exports, in particular, where there are complex contracting chains and financing arrangements.

5. Proposals on which UKEF is seeking Respondents’ views

5.1. Developments both in global trade and UKEF’s statutory powers have led UKEF to review the extent to which its current Foreign Content policy reflects the breadth of UKEF’s capabilities and the needs of UK business. UKEF has concluded that its Foreign Content policy needs to evolve to cater for scenarios that do not directly relate to a specific export contract, but which would be conducive to supporting UK exports more broadly, further to UKEF’s mission to ensure that no viable UK export fails for lack of finance or insurance, while operating at no net cost to the taxpayer.

5.2. It is intended that these proposed changes, or any changes subsequently adopted, will apply to all UKEF’s products subject to the Foreign Content policy.

5.3. UKEF proposes supplementing existing Foreign Content policy (Principle One) – see section 3 above, which is out of the scope of this consultation, with Principles Two and Three to enable a consideration of the context surrounding the business UKEF is being asked to support.

5.4. Applications will be assessed against each Principle individually and in turn. If not falling within or failing the requirements of Principle One, the application will be assessed against Principle Two. If failing the requirements of Principle Two, UKEF may consider if it can provide support under Principle Three.

Principle Two - If Principle One is not met:

5.5. The proportions of Foreign Content to UK Content set out in Principle One (the current 80:20 rule) will apply to the value of UKEF’s participation in the financing of a contract or a project, which may consist of multiple contracts.

5.6. This Principle will enable UKEF to take into account the amount of UK Content contained within related (but not directly financed or supported) contracts or projects when forming a view about a specific contract or provide support for a share of a contract where there is a specified amount of UK content.

5.7. This Principle may also enable UKEF to more easily support transactions that fall outside of a traditional one-buyer / one-supplier / one-contract model, where UK content is distributed across multiple contracts within related projects, by facilitating the aggregation of UK Content relative to a financing tranche.

5.8. The application of this principle will continue to take into account the fact that UKEF would normally support no more than 85% of a contract, in accordance with current OECD Arrangement rules.

Example A

A UK exporter has a contract with an overseas buyer worth £100m, containing £10m UK content.

UKEF could consider providing up to £50m of support to reflect the level of UK goods and services in the contract. Considering UKEF would normally support no more than 85% of a contract, this may mean maximum support available for contractual amounts is capped at £42.5m.

The outstanding proportion of the contract could be financed in a variety of ways, for example, by equity investment, by the support of another ECA or by uncovered commercial lending or similar.

Example B

There are two contracts that are supporting an overall project, but which are not contractually linked.

The first contract, consisting of design, project management, engineering etc, has £19 million of UK Content and a contract value of £20 million. This contract is being funded by commercial financing. The second contract has UK Content of £1 million but a larger contract value of £100 million. This contract is experiencing greater difficulties in obtaining commercial financing due to its complexity and size. Without financing for the second contract the project would not go ahead putting the total £20 million of UK content at risk.

UKEF would consider providing support for all or a proportion of the second contract on the basis that it would be conducive to UK supply in the first contract and proportional to the total level of UK goods and services within the overall project.

Principle Three - If the proposal cannot be supported under Principles One and Two:

5.9. UKEF may provide support if it can be demonstrated that the proposal is conducive to supporting or developing UK exports.

5.10. When providing support under this Principle, in order to demonstrate such support or development, UKEF may impose additional measures, such as incentivisation mechanisms, whereby the level of support available from UKEF will be directly linked to current or future supply chain spend or commitments made by the applicant to increase the benefit to the UK and UK exports. Examples of this could include increasing future production in the UK, increasing the value or proportion of spend in the UK supply chain in the future, or increasing the number of jobs created in the UK in the future.

5.11. A decision under this principle will involve a statement by the applicant justifying the application of this Principle, which in UKEF’s determination justifies UKEF’s provision of support.

Example C

A large international company operating in multiple sectors, has a significant UK supply chain, with research facilities, manufacturing facilities and employees based in the UK.

Due to modern and complex manufacturing methods, the UK involvement in the company’s export contracts is spread throughout the supply chain. This means under Principle One and Principle Two, UKEF would be unable to recognise the full extent of the UK value added.

In order to access UKEF support, the company is willing to increase the future level of spend with the UK supply chain. Under Principle Three, UKEF may be able to provide an amount of support for the company’s export contracts across a variety of sectors proportional to the UK supply chain spend, supporting the development of future exports.

Example D

A large non-UK domiciled international company has won a £100m contract to complete a major project overseas. In order to complete this project this company wishes to sub contract £20m to various UK companies in order to utilise their goods and services to in various phases of the project.

UKEF may, in order to encourage UK companies’ involvement within global supply chains and facilitate the development of UK exports, be able to provide up to £85m of support in line with the Department’s policy on the amount of spend by the international company on the UK subcontracts and the OECD Arrangement.

Secretary of State’s Discretion

5.12. Providing support for UK exports by assisting their financing or the financing of related contracts involves the Secretary of State’s discretion under s.1 (1) of the EIGA. Therefore, where appropriate, UKEF may, with the consent of the Treasury, depart from the outlined Principles if it is concluded that it is rational and within its statutory powers to do so.

Additional question

5.13. The Department would welcome examples of scenarios from Respondents that might not be supported by UKEF in our current approach but that may be eligible for support under the Principles as described in sections 5.5. - 5.11. to enable the Department to assess the potential for increased support to UK business.

6. Future changes

6.1. UKEF will continue to use the Department’s statutory powers, the scope provided by the Arrangement and adaptations in internal policy to address changes in global trade to support goods and/or services exported from the UK. UKEF expects the Foreign Content policy to evolve in the future to ensure the Department is best placed to utilise its support flexibly, and to accomplish its mission to ensure that no viable UK export fails for lack of finance or insurance.

6.2. UKEF makes it clear that the Department will determine whether, to what extent, and how it should consult on any changes to its Foreign Content policy. This will be in accordance with applicable government guidelines (including currently, and specifically, the Consultation Principles published by the Cabinet Office in 2018). Therefore, and irrespective of past practice, that is the basis on which UKEF intends to make consultation decisions going forward. There should be no expectation that UKEF will always consult on changes to Foreign Content policy; or indeed any other expectation beyond that UKEF will consider any such change on a case by case basis in line with then current guidelines.

1. In order to be eligible for Overseas Investment Insurance one must be carrying on business in the UK, not simply acting as a conduit for investment outside the UK. It would therefore be impractical to apply the Foreign Content policy to an investment which originates in the UK and must go into an overseas entity. ↩