Export Credit Agencies--The Secret Engine of Globalization
November 26, 2004 12:16 PM   Subscribe

Worse Than the World Bank? Export Credit Agencies--The Secret Engine of Globalization The amount of investment that export credit agencies (ECA) support worldwide is significantly greater than the total amount of lending from the World Bank, IMF and all other multilateral institutions combined. ECA's account for the single biggest component of developing country debt and half of all new greenhouse gas-emitting industrial projects in developing countries have some sort of ECA support. Investments in places like Guatemala, South Africa, Pakistan, Chile [PDF], have had unacceptable social, environmental and economic consequences. Administered or backed by a government, an ECA uses taxpayer money to make it cheaper and less risky for domestic corporations to export or invest overseas. ECAs privatize the profit and socialize the risk while negatively impacting indigenous cultures and enironments, all with little or no governmental oversight or public awareness of the matter. So what can we do about it? [PDF]
posted by faux ami (14 comments total)
I've heard of similar things happening with currency trading which is what caused the Mexican peso meltdown in the 90s. Basically the US Govt essentially guaranteed to pay back the losses to large companies on currency trading by "bailing out" a country when its currency collapsed thus there was huge speculation because it was risk-free.
posted by stbalbach at 2:07 PM on November 26, 2004

Fascinating, I'd never heard of this before. Great post, faux ami.
posted by mek at 2:29 PM on November 26, 2004

Thanks mek. There's all kinds of outrageous stuff. Of particular note is the Phillipines, still paying back $155,000 per day on a nuclear power plant which wasn't used since 1984 and messing with the energy market à la Enron.* In fact, many times, companies (including Enron) are getting paid back by developing countries' citizens (not the businesses that built the projects) such as Nigeria (which pays back more than half their GDP on these kinds of loan paybacks) for projects that totally bombed -- not even counting environmental and social damage.

Stbalbach: Exactly. Companies like Enron (to harp on them) can get basically a risk-free loan, because it's basically covered by you and me (socialize the risk), but can make profits on massive international projects (the Three Gorges Dam, which displaced millions of inhabitants). And if the project doesn't pan out, the developing country is still required to pay back the Enron's for their time and effort.
posted by faux ami at 2:51 PM on November 26, 2004

*In the 1970s, during the regime of Ferdinand Marcos, the U.S. Export-Import Bank (EXIM), one of the largest ECAs in the world, played a major role in providing, guaranteeing, and facilitating the loans for the Bataan Nuclear Power Plant (BNPP). This huge project was situated on an earthquake fault line, badly designed, unsafe, extremely overpriced (which EXIM knew), and a magnet for corruption. Because of these safety and other concerns, the plant never even became operational. Nevertheless, Filipinos have been paying it off ever since--and are scheduled to do so until 2018. The debt service cost in 2000 alone was $49 million.
But that's not all. With the mothballing of the BNPP in 1986, the National Power Corporation (NPC) lost its planned major source of power for the country, while the debts incurred for the BNPP project left the NPC with no money to invest in new generating capacity. This consequently gave rise to a power crisis in the early 1990s. President Fidel V. Ramos addressed the power shortage by inviting the private sector, or independent power producers (IPPs), to supply power. Many of these IPPs were in turn supported by the ECAs of Japan, the U.S., and the U.K. The entry of IPPs led to further, serious financial problems for the Philippine government and people. Electricity rates have skyrocketed because of the onerous provisions in the contracts (PPAs) with the IPPs, including having to pay for unused electricity.

posted by faux ami at 2:52 PM on November 26, 2004

stbalbach - I think what you are describing would have actually been good for Mexico. If you were a currency speculator betting against the Peso, wouldn't US support be the last thing you'd want? But once the Peso fell, the potential aid would have made you quicker to come in and buy Pesos, with the theory being that the US intervention would limit the potential downside.

Here is something I have never understood - what is the rationale for the dislike of these types of lending institutions? I have never really understood why there is so much blame placed on the World Bank et al. Admittedly there have been plenty of incidents in the past where money meant for specific projects ends up in a Swiss bank account, but if they didn't exist the financing costs LDC's would face would make even the worthiest development projects untenable. It would seem the problem is not the institutions themselves, but rather poor due dilligence in determining who to give loans to and the which projects to support.

Faux ami - Part of the reason why Enron (and god help me I can't believe I am defending them) went belly up was that many of the projects your article alludes to were massive failures for them as well.
posted by JPD at 2:56 PM on November 26, 2004

JPD. The point is that these ECA's finance projects (such as Enron's project in Dabhol, India) that even the World Bank thinks are a joke, whether for sustainability, impact or financial reasons. Second, Enron has a long history of getting a lot of help from the powers that be - and still managed to go belly up. They're still (with the help of the US gov't) trying to get the Indian government to pay back for Dabhol, after India bailed out due to Enron's high energy rates. Sorry for all the links - this is pricey, enormous stakes international business.

Earlier in January, Enron made the headlines over its stance on a massive power blackout that threw more than 200 million people into darkness in northern India. Enron demanded three times the normal rate for supplying power from its Dabhol plant to re-start the stalled electricity stations. Electricity was finally sourced from the government's own units.
posted by faux ami at 3:11 PM on November 26, 2004

faux ami - Really great first post. I'd never heard of this before.
posted by Civil_Disobedient at 3:54 PM on November 26, 2004

Here is something I have never understood - what is the rationale for the dislike of these types of lending institutions?

In theory these types of institutions are simply providing loans to help countries develop economically. This is ostensibly to give countries a headstart on economic development using western capital - and this is meant to make us all richer, especially them. In reality, these loans function as a type of leverage to get poorer countries to do what the US wants them to do.

There are many conditions imposed on such loans, e.g. a large percentage of the money has to be spent with US corporations, or has to be spent in particular ways. Often countries accepting these loans are pressured to privatise government assets, open markets to foreign investment and foreign goods etc. The money is often spent in ways that do not help them economically, at least proportionally for the amount of money spent

So you end up with a country with a huge debt burden but without an economy that can generate enough tax revenue to pay the bills. And when they are unable to make their debt payments this creates even more leverage which is used for privatisation, trade agreements favourable to the US etc.
posted by tranceformer at 3:54 PM on November 26, 2004

Sorry, but just one more Enron thing.
Nigeria: (March) Enron's shares in Lagos power plant is sold to AES after government accuses Enron of secrecy and bad faith in contractual obligations. World Bank provides concessional loan to Lagos power plant. World Bank approves loan to privatize Nigeria's power, telecoms, air transport, and Lagos water sectors.

Panama: World Bank's MIGA provides guarantee for Bahia las Minas power plant owned by Enron.

Dominican Republic: (June) President of Dominican Republic pledges to investigate Enron's power ''shortages'' as cause of blackouts in 1998. U.S. Embassy defends Enron against charges of fraud by DR.

(December) Investigators into Dominican Republic's power outages learn that the public assets were sold at a price almost $1 billion lower than they should have been valued. The auditor responsible for the audit of DR's assets: a local subsidiary of Arthur Andersen.

USA: (January) George W. Bush occupies the White House. California suffers rolling blackouts as wholesale power prices jump by 266%. Despite an abundance of power, power companies including Enron claimed the rates were in response to power shortages. Governor Gray Davis signs contract with power producers that lock in $43 billion in power purchases for the state over the following two decades in order to stabilize rates and avoid further blackouts. Enron is among the companies implicated in creating a false power shortage.

(February) Enron CEO Ken Lay meets with Vice President Dick Cheney. Cheney's energy task force modifies proposal to include mention of need to boost India's oil and gas production.

(March) Lay meets with Cheney again.

(April) Lay gives Cheney a memo outlining his suggestions for how to address the nation's energy needs. Among other things, Lay asks Cheney to hold off on price caps in California. Within weeks of meeting with Lay, Cheney issues a statement opposing price caps.

(April) Secretary of State Colin Powell raises Dabhol issue in meeting with Jaswant Singh, telling India's foreign minister that ''failure to resolve the matter could have a serious deterrent effect on other investors.''

(April) Cheney issues his national energy plan, after consulting with Lay and Enron officials six times

posted by faux ami at 4:11 PM on November 26, 2004

By far the single largest beneficiary of the ECAs are commercial aircraft and engine manufacturers.

Loan guarantees for sales of new Boeing jetliners are not only the largest single U.S. Eximbank line item, they take more than the next ten or fifteen line items. Airbus and its consortium members similarly hog the balance sheets of the major European ECAs.

Shutting down the U.S. Eximbank would probably cause the loss of 75,000 highly paid U.S. manufacturing and engineering jobs, overnight.
posted by MattD at 7:50 PM on November 26, 2004

Great stuff faux ami. Thanks!

Long may it exploit?
posted by nofundy at 8:15 PM on November 26, 2004

Thx nofundy and hi Matt (thanks for contributing). You're right on about the airlines: number one ECA loan-guarantee recipient is Boeing with 2.5 billion in long-term loan guarantees (2001). Then come KB&R (Halliburton), General Electric, Raytheon, Bechtel, Siemens Westinghouse. The top linked article talks about this and this 1997 EXIM financial report shows Boeing getting loan guarantees for planes to East China Airlines, Asiana, Korean and Air India. You'll notice I posted numerous government ECA sites in the lead, not just the US ones.

My friend works for Eurocopter and I know they often sell their technology and let foreign countries manufacture the helicopters with their own workforces. This is common practice to facilitate trade and jobs also.

What I'm questioning (not me, but the NGOs working on this) is transparency, public awareness and the idea that it's a level playing field out there. In fact, we're trying to match support for the Airbuses out there. This isn't pure-cut free-market economics - but mostly it's interesting how the IMF and World Bank have been demonized, while ECA's, much more powerful and daring, have managed to glide under the radar. They socialize the risk, privatize the profits all with little or no greater public awareness or gov'tal oversight.
posted by faux ami at 12:25 AM on November 27, 2004

It's still not clear to me why the governments of these countries are considered hapless victims of the ECAs. The governments voluntarily enter into these contracts and so are responsible for the consequences.
posted by metaforth at 1:22 AM on November 27, 2004

I promise I'll stop posting so much now, but metaforth, I think the idea is that these governments are desperate for investment (massive projects) and sign really shoddy agreements over the advice of their own science advisers. Plus, it's not so much the governments that are the hapless victims, but the citizens of developing countries paying for these colossal projects which they didn't necessarily approve or comment upon:

"Thus, in a matter of less than three days, an MoU was signed between Enron and MSEB in a matter involving a project of the value of over 10,000 crore rupees [almost $3 billion] at the time, with entirely imported fuel and largely imported equipment, in which, admittedly, no one in the government had expertise or experience. In fact, the file [on the project] does not even show what Enron was - what its history is, business or accomplishment.

The World Bank's doubts were echoed by the government of India's Central Electricity Authority (CEA), whose experts conducted their own analysis of the MoU and also noted many irregularities. Among their findings, they reported that the MoU did not provide specific details about the costs of the project which were required under Indian law...

posted by faux ami at 1:38 AM on November 27, 2004

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