[Senate Hearing 113-23]
[From the U.S. Government Publishing Office]
S. Hrg. 113-23
NOMINATION OF FRED P. HOCHBERG
=======================================================================
HEARING
before the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED THIRTEENTH CONGRESS
FIRST SESSION
ON
NOMINATION OF FRED P. HOCHBERG, OF NEW YORK, TO BE PRESIDENT OF THE
EXPORT-IMPORT BANK OF THE UNITED STATES
__________
MAY 7, 2013
__________
Printed for the use of the Committee on Banking, Housing, and Urban
Affairs
Available at: http: //www.fdsys.gov /
U.S. GOVERNMENT PRINTING OFFICE
81-242 WASHINGTON : 2013
-----------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Printing Office,
http://bookstore.gpo.gov. For more information, contact the GPO Customer Contact Center, U.S. Government Printing Office. Phone 202�09512�091800, or 866�09512�091800 (toll-free). E-mail, [email protected].
COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
TIM JOHNSON, South Dakota, Chairman
JACK REED, Rhode Island MIKE CRAPO, Idaho
CHARLES E. SCHUMER, New York RICHARD C. SHELBY, Alabama
ROBERT MENENDEZ, New Jersey BOB CORKER, Tennessee
SHERROD BROWN, Ohio DAVID VITTER, Louisiana
JON TESTER, Montana MIKE JOHANNS, Nebraska
MARK R. WARNER, Virginia PATRICK J. TOOMEY, Pennsylvania
JEFF MERKLEY, Oregon MARK KIRK, Illinois
KAY HAGAN, North Carolina JERRY MORAN, Kansas
JOE MANCHIN III, West Virginia TOM COBURN, Oklahoma
ELIZABETH WARREN, Massachusetts DEAN HELLER, Nevada
HEIDI HEITKAMP, North Dakota
Charles Yi, Staff Director
Gregg Richard, Republican Staff Director
Laura Swanson, Deputy Staff Director
Pat Grant, Counsel
Glen Sears, Deputy Policy Director
Brian Filipowich, Professional Staff Member
Riker Vermilye, Staff Assistant
Greg Dean, Republican Chief Counsel
John O'Hara, Republican Senior Investigative Counsel
Dawn Ratliff, Chief Clerk
Kelly Wismer, Hearing Clerk
Shelvin Simmons, IT Director
Jim Crowell, Editor
(ii)
C O N T E N T S
----------
TUESDAY, MAY 7, 2013
Page
Opening statement of Chairman Johnson............................ 1
Opening statements, comments, or prepared statements of:
Senator Crapo................................................ 2
Senator Brown................................................ 2
Senator Warner............................................... 3
Senator Warren............................................... 3
WITNESSES
Kristen E. Gillibrand, U.S. Senator from New York................ 3
Charles E. Schumer, U.S. Senator from New York................... 4
NOMINEE
Fred P. Hochberg, of New York, to be President of the Export-
Import Bank of the United States............................... 6
Prepared statement........................................... 16
Biographical sketch of nominee............................... 18
Responses to written questions of:
Senator Crapo............................................ 19
Senator Menendez......................................... 26
Senator Vitter........................................... 34
Senator Johanns.......................................... 47
Senator Toomey........................................... 48
Senator Coburn........................................... 50
Additional Material Supplied for the Record
Letter submitted by R. Thomas Buffenbarger, President,
International Association of Machinists and Aerospace Workers.. 58
Letter submitted by various associations in support of Mr.
Hochberg's nomination.......................................... 59
NOMINATION OF FRED P. HOCHBERG, OF NEW YORK, TO BE PRESIDENT OF THE
EXPORT-IMPORT BANK OF THE UNITED STATES
----------
TUESDAY, MAY 7, 2013
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 10:24 a.m., in room SD-538, Dirksen
Senate Office Building, Hon. Tim Johnson, Chairman of the
Committee, presiding.
OPENING STATEMENT OF CHAIRMAN TIM JOHNSON
Chairman Johnson. Good morning. I call this hearing to
order.
Thanks to all of you for joining us here today, and special
thanks to our witness and the assembled Members who are with
us.
Today, we consider the nomination of Fred Hochberg to be
the President and Chairman of the Export-Import Bank of the
United States. President Obama first nominated Mr. Hochberg to
be President and Chairman of the Export-Import Bank on April
20, 2009. The Senate confirmed his nomination by unanimous
consent on May 14, 2009. Mr. Hochberg was re-nominated by
President Obama on March 21, 2013. I am hopeful that the
Committee and the Senate will once again move as expeditiously.
When he took over the Bank, the U.S. was still in the midst
of the worst financial crisis since the Great Depression. Under
his leadership, the Bank was able to expand financing for
American exporters when private financing was difficult, if not
impossible, to acquire. During President Hochberg's tenure, the
Bank's authorizations have increased substantially to a record
$35.8 billion in export financing last year. This financing is
important for American business, both small and large. I
believe his leadership at the Bank is crucial as we continue on
the path to economic recovery.
His nomination is supported by both labor and business,
including the Business Roundtable, the Chamber of Commerce, and
the National Association of Manufacturers, and I would like to
submit these organizations' letters of support for the record.
In 2012, the Export-Import Bank helped to support an
estimated 255,000 American jobs at 3,400 companies. In
addition, 85 percent of the Export-Import Bank's transactions
directly benefited small business.
Of equal importance, since 2008, the Export-Import Bank has
been able to send nearly $1.6 billion in profits to the U.S.
Treasury. As a self-sustaining independent Federal agency, the
Export-Import Bank charges fees to cover all of its expenses,
creating no cost to the U.S. taxpayers.
Just last year, Congress, with bipartisan support, extended
the Export-Import Bank's charter through September 30, 2014.
Before we once again consider reauthorization, it is imperative
that we ensure that the Bank's leadership is in place. If we do
not once again confirm Mr. Hochberg before July 20, we run the
risk of leaving the Bank without a quorum to act on many of the
transactions before it, which will hurt American workers and
exporters.
I look forward to hearing from President Hochberg today.
I now turn to Senator Crapo for any opening remarks he may
have for the nominee. Senator Crapo.
STATEMENT OF SENATOR MIKE CRAPO
Senator Crapo. Thank you very much, Mr. Chairman. I
appreciate you holding this hearing.
Mr. Hochberg is no stranger to confirmation hearings. He
has previously been confirmed as Deputy Director of the Small
Business Administration in 1998 and then as Chairman and
President of the Export-Import Bank again in 2009. And this
Committee has had ample opportunity to get to know Mr. Hochberg
in this latter role, as he has appeared before us on multiple
occasions over the last 4 years.
Last year's Eximbank reauthorization granted both new
opportunities and new challenges to the Bank's mission and I
look forward to hearing from Mr. Hochberg about how he intends
to respond to some of these challenges, specifically, what is
currently the most substantial obstacle to private sector
financing that the Eximbank is working to overcome? And what
steps will Mr. Hochberg take to mitigate the tension between
the Bank's support for export transactions and the adverse
impact to domestic companies? How will Mr. Hochberg work to
address the perception that the Bank is offering so-called
corporate welfare in the form of subsidies for big business,
and how will he facilitate the financing of small business
exports? And, finally, what steps will the Export-Import Bank
take to protect taxpayers by prudently managing the risk of the
Ex-Im's portfolio, which contains a large volume of recent
transactions?
I look forward to hearing Mr. Hochberg's testimony and his
answers to these questions, and Mr. Hochberg, I thank you for
your service at the Bank and welcome you here today.
Thank you, Mr. Chairman.
Chairman Johnson. Thank you, Senator Crapo.
Does anyone else wish to make a short opening statement
before we turn to the nominee for his testimony? Senator Brown.
STATEMENT OF SENATOR SHERROD BROWN
Senator Brown. Thank you, Mr. Chairman.
I only want to add my good words to the comments of the
Chair and Senator Crapo about Mr. Hochberg and his leadership.
If done right, our Nation's trade policies can create jobs. The
work that Mr. Hochberg has done at the Export-Import Bank has
been central to achieving this goal. His trips to Ohio, to
Perrysburg to First Solar, to Columbus, to Cleveland, to
Cincinnati, I think, have been particularly helpful.
I know the President's goal of doubling exports, what is
central to that goal is the work that we do with small
business. Large businesses know how to do it, know how to
generally navigate some of the obstacles. Smaller businesses
need that partnership with the Eximbank and SBA and the Export
Assistance Centers and all of that, and Mr. Hochberg's Eximbank
is a central part of that.
So I thank him and look forward to this hearing.
Chairman Johnson. Anybody else?
Senator Warren. Mr. Chairman, I just----
Chairman Johnson. Senator Warren.
STATEMENT OF SENATOR ELIZABETH WARREN
Senator Warren. Thank you. I just want to add, thank you
very much, Mr. Hochberg, for your service, and thank you very
much for your many trips to Massachusetts. It means a great
deal to the businesses in Massachusetts, particularly our small
businesses that are trying to get adequate funding so that they
can be involved more vigorously in the export business. Thank
you.
Chairman Johnson. Senator Warner.
STATEMENT OF SENATOR MARK R. WARNER
Senator Warner. I would not want to offend President
Hochberg, but I also want to make sure I can lay claim. I am
glad to see my friend and colleague, Senator Gillibrand, is
here to introduce Mr. Hochberg, but let the record also show he
has got a deep and abiding connection with the Commonwealth of
Virginia, as well, and I appreciate the time we spent together,
Fred.
Chairman Johnson. We will now proceed to witness
introductions. Senators Schumer and Gillibrand will introduce
Fred Hochberg. Senator Gillibrand.
STATEMENT OF KIRSTEN E. GILLIBRAND, U.S. SENATOR FROM THE STATE
OF NEW YORK
Senator Gillibrand. Thank you, Mr. Chairman. Thank you for
your leadership and thank you for your dedication. Thank you to
Ranking Member Crapo, Members of the Committee, to my
colleague, who will be arriving shortly.
It is an honor for me to join you today to introduce Fred
Hochberg for a second term as the President and Chair of the
U.S. Export-Import Bank.
As a member of the President's Export Council myself, I
know Fred is committed to achieving President Obama's goal of
doubling America's exports, and I am eager to work closely with
him in this effort.
Fred is, without a doubt, the right choice to continue
leading the Export-Import Bank. Under Fred's leadership, the
Export-Import Bank is doing tremendous work to strengthen our
economy and help businesses across the country reach new
markets and grow our exports in an increasingly competitive
global market. The Export-Import Bank is helping businesses of
all sizes in our home State of New York to do just that.
Take the Sensis Corporation in Syracuse, a leading provider
of air traffic management solutions for both civil and defense
industries. Sensis was in dire need of working capital when
lenders were not offering it, putting jobs in Upstate New York
at risk. The Export-Import Bank stepped in to give lenders the
confidence they needed to invest in Sensis, keeping 700 jobs in
Syracuse, and put the company on firm foundation for growth.
Today, Sensis's North American presence is stronger than ever,
expanding its portfolio with a range of new, innovative
products.
Other small businesses, like Love and Quiches on Long
Island--small businesses are the most powerful private sector
job creator we have. But like many small businesses, this Long
Island bakery was struggling to get a line of credit it needed.
Again, the Export-Import Bank stepped in with its Small
Business Export Credit Insurance. That confidence and security
helped take Love and Quiches from the small personal kitchen
its founder launched it from and is now selling desserts to
countries on the other side of the globe and opening a new
state-of-the-art facility in Freeport, New York, supporting
more local jobs.
That is the vision for the Export-Import Bank that Fred
holds, providing the confidence that businesses need to grow,
reach new markets all over the world, while creating new, good
paying jobs here at home. New York and all of America is just
bursting with economic potential, whether it is groundbreaking
research and innovation that we can translate to new businesses
and new markets, or manufacturing new clean energy technologies
to helping small businesses achieve their dreams.
I am confident that with Fred's leadership, we can harness
every ounce of our potential and make sure that this century is
another American century leading the global economy and
supporting new American jobs for a stronger middle class.
Thank you, Mr. Chairman. Thank you, Mr. Ranking Member.
Thank you, Members of the Committee.
Chairman Johnson. Thank you, Senator Gillibrand.
Senator Schumer.
STATEMENT OF CHARLES E. SCHUMER, U.S. SENATOR FROM THE STATE OF
NEW YORK
Senator Schumer. Mr. Chairman, first, let me thank you for
being so accommodating and moving the time back a little bit so
I could be here to introduce our great Export-Import Bank
President and a good friend of mine for decades. We had a very
important committee meeting, which Senator Warner attended, as
well, the annual meeting of the Joint Committee on the Library,
and that was scheduled by our House Chairman at ten o'clock, so
I had to be there and I appreciate your accommodating me.
I want to thank Senator Warner. What an instrumental role
he played in that meeting and making the Joint Committee work
so well.
Senator Warner. Mr. Chairman----
Chairman Johnson. Senator Warner.
Senator Warner. Mr. Chairman, I just want to correct my
distinguished Chair of the Rules Committee. I was actually only
there for the Joint Committee on Printing----
Senator Schumer. Printing.
Senator Warner. ----not Library.
[Laughter.]
Senator Schumer. Right. Excuse me. He was so overwhelming
on Printing that it washed over into how good he did on the
Library Committee.
[Laughter.]
Senator Schumer. Anyway, I am honored to introduce my good
friend, Fred Hochberg. Fred is an accomplished businessman. He
is a public servant. He is just a fine and honorable person,
and as I said, has been a good friend for decades.
I am delighted to support his re-nomination to head the
Export-Import Bank. He has had great service to our country in
public service, in academia, and in the business world. And
throughout, there is one hallmark. He has always dedicated
himself to creating jobs here in America and making this
country a better place. That is what the Export-Import Bank is
all about. He knows how to do this, as I am sure my colleague,
Senator Gillibrand, probably mentioned. Well, she is gone, but
probably did mention.
She may be going to the Joint Committee on the Library now.
[Laughter.]
Senator Schumer. He spent two decades of his career with
the Lillian Vernon Corporation, founded by his mother. His mom
was an immigrant. She fled Nazi Germany, founded the company
with $2,000 in wedding gift money. And under Fred's leadership,
the company was transformed from a small mail-order company to
a wildly successful publicly traded corporation that employed
more than 1,000 people, many in New York.
From Lillian Vernon, Fred moved on to found and serve as
President of Heyday, and that was an investment firm that
managed real estate and made venture capital investments.
In 1994, he came to Washington. He joined the--he was
always dedicated to public service, even when we first met.
That was his goal, not just to become wealthy, but to do some
good in the Government. And he joined the Clinton
administration as Deputy Administrator and then Acting
Administrator of SBA. As we all know, small businesses are
engines of our economic growth. His experience and record of
accomplishment in both business and Government shows he knows
what is important to the success of small business. In fact,
under Fred's leadership, the Eximbank approved 3,313
transactions for small business in 2012, $6 billion in
financing and insurance for small business. That is a record
for the Export-Import Bank.
He has also used his expertise to improve the operational
efficiency of the Bank. The average time to approve
transactions dropped by more than--close to 300 percent, from
163 days in 2009 to 60 days in 2012.
Fred has also made an impact in his personal endeavors. He
and his long-time partner and my friend, Tom Healy, who is
right behind me, are active in numerous philanthropic and civil
rights groups. I want to thank them for what they have done to
improve the lives of so many New Yorkers.
In conclusion, the Eximbank is a linchpin in creating good
and sustaining jobs. Fred's record at the Export-Import Bank
speaks for itself. Four years ago, Mr. Chairman, I said before
this Committee, it was clear to me that Fred possesses, quote,
``the entrepreneurial spirit, the sense of civic duty, and the
chutzpah necessary to excel as head of the Import-Export Bank--
Export-Import Bank.'' He would have been good at the Import-
Export Bank, too. Over the last 4 years, Fred has proven that
if I misspoke then, it was only in understating his talent and
workmanship.
So I want to thank you, thank the Committee, and Freddie,
congratulations on the nomination. I know you are going to
continue to do a good job, and I am glad you have decided to
serve for a second term.
Chairman Johnson. Thank you, Senator Schumer.
We will now proceed to the oath. Will the nominee please
rise and raise your right hand.
Do you swear or affirm that the testimony that you are
about to give is the truth, the whole truth, and nothing but
the truth, so help you God?
Mr. Hochberg. I do.
Chairman Johnson. Do you agree to appear and testify before
any duly constituted committee of the Senate?
Mr. Hochberg. I do.
Chairman Johnson. Please be seated.
Please be assured that your written statement will be part
of the record. Please also note that Members of this Committee
may submit written questions to you for the record and you
should respond to these questions promptly in order for the
Committee to advance your nomination.
Mr. Hochberg, I invite you to introduce your family and
friends in attendance before beginning your statement. You may
begin.
STATEMENT OF FRED P. HOCHBERG, OF NEW YORK, TO BE PRESIDENT OF
THE EXPORT-IMPORT BANK OF THE UNITED STATES
Mr. Hochberg. Well, thank you, Chairman Johnson, Ranking
Member Crapo, and Senator Schumer.
Let me introduce my partner, Tom Healy, who is here. My
mother actually is recovering in the hospital, but she is
watching on video. So my mother, Lillian Vernon, will be
watching, and she will have comments for me afterwards.
Chairman Johnson. We wish her well.
Mr. Hochberg. And I feel very fortunate to have both
Senators Schumer and Gillibrand, who I have known for many,
many years, before both of them served in the Senate, for their
introductions today.
Additionally, I want to thank President Obama for
nominating me for a second term as President and Chairman of
the Export-Import Bank.
If confirmed, I assure you that I will do my level best to
assure that U.S. businesses large and small will be able to
better compete on a level playing field in support of American
jobs.
As you mentioned, Chairman Johnson, 4 years ago, in the
midst of a recession, I was fortunate enough to be nominated
and later confirmed by this Committee. At that time, commercial
banks were reluctant to lend, making Ex-Im's ability and need
to fill the void all the more critical. Some of those
challenging conditions have been arrested, but some are still
with us today. And for the past 4 years, thanks to the
dedicated staff of Eximbank, we have grown export financing
that has translated into more U.S. jobs.
In 2008, it was estimated, using Department of Commerce
data, that Eximbank financing supported just over 144,000 jobs.
By 2012, our financing supported an estimated 255,000 jobs, or
more than 1,000 jobs for each and every working day of the
year. And we did that in every State across this country.
These efforts have contributed to President Obama's goal of
doubling export the National Export Initiative--to double
exports and add two million jobs by the end of 2014.
As has been mentioned before and Senator Schumer commented
on, I was in business for 20 years, for two decades, at Lillian
Vernon, which began as a small company that my mother started
on our kitchen table and ultimately grew to be a publicly
traded company on the American Stock Exchange. With my business
experience, I know that a critical component of job growth is
small businesses.
In fiscal year 2008, Eximbank financed $3.2 billion in
loans, guarantees, and insurance for small businesses. In
fiscal year 2012, $7.5 billion in small business exports, of
which $6.1 billion was direct. And let me just add, we have
done more for small business in the past 4 years than the
previous 8 years combined--more in the last 4 years than the
previous 8 years.
To achieve such growth in small business, we have
implemented new products. Let me just mention two. One, Express
Insurance, which actually just recently received an award for
Innovation in Government from Harvard's Kennedy School of
Government. It has helped more than 500 businesses get an
answer for their insurance application in 5 days or less.
We have also recently launched, and Senator Sherrod Brown
mentioned, U.S. Global Business Solutions. We launched that
last month. This is a new program, a pilot program that brings
together the SBA, Eximbank, and Commerce to make it more
streamlined and easier for small businesses and their lenders
to help them on exports.
On top of that, as the Senator mentioned, we have improved
customer service. Ninety percent of all transactions are
completed in 30 days, 98 percent within 100 days or less, and
we are working to improve that even more.
To do that, we need to reach more small businesses. We have
partnered with the United States Chamber, the National
Association of Manufacturers, many banks, and have held more
than 50 small business forums around the country, a number of
which Senator Brown mentioned. We have done these from
Billings, Montana, to Shreveport, to Charlotte, to San
Bernadino, and many, many other cities around this country.
Last, if confirmed, I will assure that the Bank continues
its prudent oversight and due diligence standards to protect
taxpayers. Every 90 days, we submit a default report to
Congress. The report on March 31, 2013, showed a default of
less than one-third of 1 percent. On top of that, over the past
5 years, Eximbank has generated $1.6 billion for U.S.
taxpayers, and that is above and beyond all of our
administrative cost, operating costs, claims, and loan loss
reserves. We operate at no cost to taxpayers and actually
generate revenues for them while supporting U.S. jobs.
Let me close. U.S. businesses face unprecedented
competition from around the globe. As a businessman myself, I
know that they need to compete on value, on price, on quality.
But the good news is, the ``Made in America'' brand is stronger
than ever and is desired by more and more foreign buyers, and
that is where Eximbank comes in. If confirmed, I will continue
to work with Congress, the Administration, U.S. companies large
and small, and their workers to enhance competitiveness and
support U.S. jobs.
Thank you, and I look forward to your questions.
Chairman Johnson. Thank you.
As we begin questions, I will ask the Clerk to put 5
minutes on the clock for each Member.
Mr. Hochberg, during the most recent economic crisis, the
Bank was able to step up and assist American exporters who were
finding it difficult to acquire private financing. This
assistance by the Bank had a substantial benefit for many
American companies and workers. Can you explain the role the
Bank played during the crisis and why ensuring the continued
stability of the Bank is vital to protect against any unforseen
downturns in the economy?
Mr. Hochberg. Well, thank you, Chairman Johnson. One of the
things that we do in the middle of a financial crisis, and we
tend to be countercyclical, is we fill a void, particularly
when commercial banks have their own credit limits, and this is
particularly acute in the last three or 4 years with small
businesses. It is another reason why we have done more small
business volume in 4 years than the previous 8 years.
So small business has been particularly hurt hard, and in
addition, at times, different banks have either lending limits
by product sector or country of export. So we help fill in
those gaps when individual banks have those problems.
Chairman Johnson. To continue to protect taxpayers, we must
ensure that the Bank has responsible risk management practices
in place. What is the Bank doing to assure Congress and the
American people that its risk management procedures are
appropriate?
Mr. Hochberg. First of all, Senator, we take our loan
losses, or every time we book a loan on our books, we make a
reserve based on a credit evaluation of what that loan could
possible yield in a loss, and that is done by a separate credit
policy group. So we have substantial reserves. Our reserves now
are over $4.6 billion to back up loans we have made.
On top of that, we recently received a report from GAO
looking at our credit risk policies. We have completely agreed
with GAO and are in the midst of implementing all of their
recommendations.
Chairman Johnson. The Bank is required to ensure that at
least 20 percent of its annual authorizations goes toward small
business. Under your leadership, the Bank has substantially
increased financing for small business, but it can do more.
What challenges do small businesses face when seeking export
financing, and what can you do to make the Bank more responsive
to the needs of U.S. exporters located in rural areas?
Mr. Hochberg. Well, Chairman Johnson, as Senator Schumer
mentioned, I came from a small business and I worked at the
Small Business Administration under President Clinton, so I
have taken to heart and made central to the Bank our work in
the small business arena.
We have done, for example, about 50 Global Access Forums,
seminars in different areas of the country. Senator Brown
mentioned I have done a number in Ohio. I have done them in
Virginia, Massachusetts, Billings, Montana, with Senator
Tester, so in a lot of rural communities.
In South Dakota itself, Rosenbauer, which makes fire
trucks, we have worked with them to finance their exports out
of South Dakota. So many companies that are not just selling ag
products but actual hard capital goods are located in rural
America. Rosenbauer is one, and Daktronics, which makes these
very high-tech scoreboards, is another company in South Dakota
that we help them export.
Chairman Johnson. Mr. Hochberg, many other countries devote
substantially more resources to their export credit agencies
than the U.S. does. What is the Bank doing consistent with its
charter and mission to ensure that it remains competitive in
relation to other export credit agencies? How does the Bank
help to maintain a level playing field for American companies?
Mr. Hochberg. In a number of ways. One, the OECD, the
Organization for Economic Cooperation and Development, sets a
framework on how export loans are made, how long a loan can be
made and what kind of fees or points, the way you pay points on
a mortgage. That gives a level playing field with the 30-plus
countries that are in the OECD.
One of our biggest challenges today is to bring other
countries in. Most notably, China is not a member of the OECD,
not a part of the framework, nor Brazil, nor India. Russia is
moving in that direction. So we have a lot of these very strong
and emerging competitors, and China is a formidable competitor
that is not a member.
President Obama met with then-Vice President Xi and is
working toward a framework by the end of 2014 that would bring
them into the OECD so we can better be more transparent and
find a way to limit export credit as much as possible. So that
is still a large challenge ahead of us and it is a huge
challenge, really, for American companies as they compete with
countries like that.
Chairman Johnson. Senator Crapo.
Senator Crapo. Thank you very much, Mr. Chairman, and
President Hochberg, again, thank you for your service at the
Bank and for appearing here with us today.
I would like to ask you to respond to the criticism that I
know you are aware of that many are raising now with regard to
the Export-Import Bank's functions in the context of the
feeling that the Bank is basically providing corporate welfare
to some of America's largest corporations and that it truly--
that the function of the Bank truly is not needed because these
large corporations do not need that kind of assistance,
particularly from a Government-backed function.
Mr. Hochberg. Senator Crapo, most of the loans we make, the
vast majority, are actually to customers of U.S. companies.
They are not made to the large U.S. companies you are referring
to. They are made to their customers. And when a customer,
whether it is in India or Colombia or anywhere in the world, is
making a purchase decision, they are going to choose between
American products or products made in China or Germany, Japan,
Korea, and so forth. Each of those countries provides export
support and export loans to support those exports.
We cannot unilaterally disarm by not making sure that we
are backing American companies and American jobs, to make sure
that if they need our financing to close the sale, it is
available. Many times, they do not need it, but when they do,
when they are going toe-to-toe with a competitor that has
export financing arranged, we need to make sure they have it,
as well.
Senator Crapo. Well, thank you. And in that context, what
is the Bank doing, or how do you deal with the issue that
arises when you are supporting certain businesses or certain
export transactions and the adverse impact that that can have
with regard to other American companies who are competitors in
that market?
Mr. Hochberg. We have at the Export-Import Bank something
called an Economic Impact Procedure that does just that. We
want to make sure--we are about U.S. jobs. We are about
creating, supporting, and sustaining U.S. jobs. So we want to
do nothing that is going to hurt U.S. jobs.
So when we evaluate each and every transaction, we review
it to make sure that the benefits of that transaction will
outweigh any harm. We cannot eliminate harm. We just want to
make sure the benefits outweigh the harm, and we do that on all
transactions. Depending on the transaction, we will do a more
in-depth study if it is warranted.
Senator Crapo. Thank you. And to change topics just a
little bit, you mentioned in your remarks that the Bank
operates at no cost to the taxpayer. What liability does the
American taxpayer have for the loans that are not repaid, or
any other program liability?
Mr. Hochberg. Well, currently, as I mentioned, our defaults
are running less than one-third of 1 percent, and our reserves
are over 2\1/2\ percent. So our reserves are well, well in
excess of the kind of write-offs that we have had to make on an
annual basis.
We do a thorough job to begin with of underwriting. The
first step is really to make sure we are underwriting a loan
that has a reasonable assurance of repayment. We monitor that
loan on an ongoing basis. We true up the portfolio every year
at year end. We are audited by Deloitte and Touche on an annual
basis and have an unqualified financial statement each and
every year. GAO provides oversight. We have a close working
relationship with our Inspector General. So there are a lot of
control mechanisms in place, but it really starts with good
underwriting to begin with.
Senator Crapo. Thank you. And a number of us have mentioned
the value of small business support. What ideas do you have to
further facilitate the financing of small business exports?
Mr. Hochberg. Small businesses, and I ran a small business,
as has been mentioned before, have a challenge receiving credit
in any environment, and particularly in this environment, and
particularly when they are looking to sell overseas.
One of the ways we do this is by running these forums that
I believe you and I are scheduling to do one in August in
Idaho.
Senator Crapo. Yes.
Mr. Hochberg. We have done, as I said, approximately 50 of
them, because a lot of it is about getting information out
there. Tom Donohue of the Chamber of Commerce has been a
partner with us, Jay Timmons at National Association of
Manufacturers, and many States, as well as the SBA and others.
So part of it is getting the word out.
The other thing is better customer service. You know, we
are trying to do our Express Insurance that received this
award. We turn around and give a quotation for a customer to
get insurance for an overseas sale within 5 days. We are
looking to make those kind of innovations that will make sure
that small businesses can compete and win globally.
Senator Crapo. Thank you.
Chairman Johnson. Senator Warren.
Senator Warren. Thank you, Mr. Chairman, and thank you
again, Chairman Hochberg, for being here and for your service.
Your work has been extraordinary. I know you took over in very
hard times and you have been able to accomplish a lot for our
businesses and, I am sure, for those who work for those
businesses. They are very grateful for your work. I
particularly appreciate your focus on small businesses and on
streamlining your procedures to make them more accessible.
I want to ask you, though, about something else, and that
is in 2011, as you know, Congress negotiated a Korea Free Trade
Agreement, and at the time that it was negotiated, the U.S.
Trade Representative cheered the agreement for the
opportunities it would provide for creating more trade with
Korea. I am sure you have noticed, though, that the facts have
not worked out so clearly.
Since the agreement went into effect in March 2012, trends
in trading patterns with Korea have been alarming, and I
checked the numbers between February 12 and March 2013, which
is the most recently available data. U.S. imports globally grew
by 5 percent, but they increased from Korea by 17 percent. Our
exports to the world increased by 11 percent--very good news--
but they decreased to Korea by 5 percent. So, looking at this
another way, while our Nation's global trade deficit shrunk 5
percent, our deficit with Korea increased by a staggering 170
percent. To put a specific number on it, our trade deficit with
Korea was about $1.5 billion during this time period.
So the question I want to ask is, your job is to increase
exports and to reduce our trade deficit. Do you think that the
Korea Trade Agreement has made it harder for you to do that,
Mr. Chairman?
Mr. Hochberg. I do not see an impact in that regard. Our
trade that we are engaged with at Eximbank with Korea has
primarily been in two areas. It has been in aircraft. Korean
Airlines, I am happy to say, is a very strong Boeing customer
and we have worked with them on some joint financing. Also in
some of the areas of renewable energy, solar panels and solar
energy. But we do not have a strong book of business with Korea
outside of that.
I actually have planned a trip to Korea later this year
because there are a number of Korean infrastructure firms and I
want to make sure that they start buying from the United States
when they are doing infrastructure in third countries. So that
is one of our goals, is to increase that footprint for American
companies, because these Korean EPC firms, as they are referred
to, engineering procurement and construction, are very
formidable and I want to make sure that American companies get
their fair share of that.
Senator Warren. Well, I appreciate that you are trying to
do that, because, obviously, just based on the math, something
is not working very well for the United States on the Korea
Free Trade Agreement and it seems to be working at cross-
purposes with what it is that you are trying to accomplish.
As you know, the U.S. Trade Ambassador is currently
negotiating the Trans-Pacific Partnership Agreement. Has your
office played a role in those negotiations?
Mr. Hochberg. We do not. Really, the role of the U.S. Trade
Representative is really to formulate the trade agreements.
Once they are in place, our goal is to--companies that need our
support in those markets, is to work with them in those
markets.
Senator Warren. Do you think it would be helpful--I am a
little concerned because of the data out of Korea--if we asked
the Trade Representative to involve you more in the
negotiations, or do you think that is not an appropriate role?
Mr. Hochberg. It is--you know, we are really about
implementation at the Eximbank. So in terms of trade policy,
that really is somewhat outside of our lane. With the jobs we
are trying to sustain and support at Eximbank, I have got my
hands pretty full in supporting----
Senator Warren. Fair enough.
Mr. Hochberg. ----U.S. exporters in the work we are doing
right now.
Senator Warren. Fair enough. Thank you.
I just have one more, and I want to just try to ask it
quickly. There have been some troubling indications that the
big banks see the Trans-Pacific Partnership Agreement and the
Trans-Atlantic Trade and Investment Partnership as
opportunities to weaken financial regulations, a chance for
these banks to get something done quietly, out of sight, that
they could not accomplish in a public place with the cameras
rolling and the lights on. And this is a really serious concern
for me.
So I have a question about future negotiations. If you are
involved in any way in future negotiations, whether it is
formally or informally, as you monitor these negotiations, will
you take a close look at the terms and do what you can to make
sure that these agreements do not become a back door way to
water down financial regulations for the large banks?
Mr. Hochberg. Well, I can say the following, also. We have
probably some of the strongest banks in the world right now
because of the kind of reserves that have been put in and the
fact that they have beefed up their balance sheets, and so that
is what we need to work with, because most of the loans we make
are guaranteed. We work with a bank and we guarantee those
loans.
For a number of years, we made a large number of loans with
European banks. They have largely exited the market because of
their weakened condition. So a stronger banking system is far
better for Eximbank because we can work with a lot stronger
banks that way.
Senator Warren. Thank you, and I apologize for running
over, Mr. Chairman. Thank you.
Chairman Johnson. Senator Warner.
Senator Warner. Thank you, Mr. Chairman, and President
Hochberg, good to see you again.
I want to take a slightly different approach than my
colleagues. You know, one of the things that I think you
pointed out was the stellar record of the Export-Import Bank,
never cost the taxpayer a dollar, and I would think that would
be partially because you have created this project finance
expertise inside the Export-Import Bank that has provided value
to American businesses, value to the American taxpayer.
I mean, I, for one, believe that we need another tool in
our tool box as we look at infrastructure and have been a long-
time supporter of the bipartisan efforts here in the Senate to
put together an Infrastructure Bank, which in many ways would
be really a project finance expertise so that those who are
critical of efforts like around Solyndra and elsewhere, we
could concentrate that project finance expertise in one
location. Even good projects where we have got things like
TIFIA right now, which has got a good record, but we are
finding it is hard to get long-term good people to stay at
TIFIA because they are not sure whether it is going to be the
long-term career.
Can you just speak for a moment about the value of having a
separate independent institution like the Export-Import Bank
with professional staff and how that has built the kind of good
underwriting standards and project finance expertise in your
institution?
Mr. Hochberg. I can try. Well, practice does make perfect,
and not that we are perfect, but I am very proud of the team
that John Schuster, who heads up our Project Finance Group at
Eximbank. We now do more project finance loans than
transportation. It is actually the largest single area of the
bank. And that partly is talking about the global
infrastructure boom that we want to make sure U.S. companies
participate in. These projects are very large. They are very
complex. And having the expertise both on the financial side,
on the legal side, I think, has helped us be seen as a leader
in that regard and we have brought a lot of business to the
United States as a result.
I mean, more than one--a number of projects have said,
because of our financing, they have actually moving more
procurement and more of the services. Last year, about--we did
over $10 billion worth of service exports in this very area you
are talking about.
Senator Warner. I think, Mr. Chairman, it would show that
if we had that capability for transportation, water, energy, in
a single location on the domestic side, it would be a great
asset, and I, frankly, think the Export-Import Bank is a great
model on that project finance side. I mean, I think those of us
who have been advocates for Infrastructure Banks have sometimes
said we are not creating a new GSE. We are really trying to
create a domestic version of the Export-Import Bank, and I
think, again, the record of the Export-Import Bank is a good
one to follow.
Let me also follow up on something Senator Brown was
mentioning. I applaud what you are doing in terms of trying to
help small businesses, and I, like Senator Warren, may be
trying to get you a little bit out of your lane here again. But
I continue to think that the--if you are a small to mid-size
business in America trying to navigate now you are going to
export a product or service, it is still kind of a confusing
mess between Export-Import, OPIC, USTR, Commerce, all the other
various agencies.
Have you thought--I know that the Administration put
forward some level of trade consolidation efforts that had
maybe a half-day life here on the Hill before it got shot down
a year past. Were you involved in any of those conversations
about how we might want to rationalize our export activities
for small and mid-size businesses?
Mr. Hochberg. Well, first of all, we have--not waiting for
legislation, we actually have something called U.S. Global
Business Solutions that was launched in early April as a
pilot--we are going to monitor it between now and the fall--
which pulls together the SBA, the Export-Import Bank, and the
Commerce Department. So we are finding ways to not wait but to
move ahead as best we can, where we can find common ground to
make sure we help small businesses and, importantly, their
lenders, because if we make it easy for the lenders, we
actually make that easier for small businesses.
Senator Warner. One of the things I hope that we can look
at, Mr. Chairman--I do not know, it may be a little bit out of
our purview here--but how we get that single portal so that
small to mid-size businesses do not have to navigate their way
through the jumble of Federal bureaucracy to get that right.
My time is about up. I will just ask one other question for
the record. One of the issues that when we were going through
the reauthorization we were looking at is asking you to take a
look at domestic content. We all want to make sure we have
got--obviously, that this is supporting of American businesses.
But that definition of domestic content might need a fresh look
so that we can really make sure that we are not excluding
American businesses. And I know, again, with the discretion of
the Chair, if you want to make any quick comment, but if not,
you can answer me later. Can you----
Mr. Hochberg. Again, the focus of the Export-Import Bank is
about U.S. jobs. We are not a national interest export credit
agency like most of our competitors are, frankly.
Congress has asked, and we have a content report that is
due at the end of this month. We have spent the last 6 months
with focus groups, public comment. We have been assembling that
and are going to be sending a report to you and your colleagues
at the end of May.
Chairman Johnson. One last question. Congress has enacted
legislation to restrict the Eximbank from making loans or
providing guarantees in relation to certain projects or
companies that conduct prohibited business in or with Iran.
What has the Bank done to ensure that it is in compliance with
this legislation?
Mr. Hochberg. We take the requirements in the public law in
terms of restrictions on Iran. We have fully implemented the--
it is referred to as Section 18 in our Reauthorization Act on
Iran. We require certification by each company we do business
with that it is not doing business with Iran, that we are in
compliance with Iran sanctions. All transactions over $100
million are circulated to the NAC, the National Advisory
Council, which includes Treasury, State. So there is a rigorous
process to ensure that we are in full compliance with the Iran
sanctions that pertain to lending to foreign export finance.
Chairman Johnson. Does anyone have any other questions? If
not, thank you, Chairman Hochberg, for your testimony today.
We will leave the record open until Thursday, May 9, at
noon, so that Members can submit additional questions. Chairman
Hochberg, please submit your answers to us as soon as possible.
This hearing is adjourned.
[Whereupon, at 11:08 a.m., the hearing was adjourned.]
[Prepared statement, biographical sketch of nominee,
responses to written questions, and additional material
supplied for the record follow:]
PREPARED STATEMENT OF FRED P. HOCHBERG
To Be President of the Export-Import Bank of the United States
May 7, 2013
I would like to thank President Obama for nominating me for a
second term as President and Chairman of the Export-Import Bank of the
United States (``Ex-Im Bank'' or ``Bank''). I also want to thank
Chairman Johnson for calling this hearing today and thank the Members
of this Committee, including Ranking Member Crapo and others who I met
with prior to the hearing. If confirmed, I will do everything in my
power to assure that U.S. businesses, large and small, will be able to
compete on a level playing field in support of American jobs.
The Ex-Im Bank is the official export credit agency of the United
States. The mission of Ex-Im Bank is to enable U.S. companies--large
and small--to turn export opportunities into sales that help maintain
and create U.S. jobs which contribute to a stronger national economy.
The Bank achieves its mission by providing export financing through its
loan, guarantee, and insurance programs in cases where the private
sector is unable or unwilling to do so. Ex-Im Bank also provides
support when necessary to level the playing field when financing is
provided by foreign Governments to their companies who compete for
export sales with U.S. exporters.
I was fortunate to be nominated and confirmed 4 years ago during a
very difficult time for our economy. We were in the midst of a
recession and commercial banks were reluctant to lend, making Ex-Im
Bank's ability to fill the void all the more critical. Over the past 4
years, thanks to the dedicated staff of Ex-Im Bank, we have grown
export financing significantly, supporting more and more U.S. jobs. In
2008, using Department of Commerce data, it was estimated that Ex-Im
Bank financing supported 144,800 jobs. By FY2012, our financing
supported an estimated 255,000 jobs across the country. These efforts
have contributed to the President's National Export Initiative goal of
doubling exports by 2015. If confirmed, I look forward to continuing
that job growth as our Nation continues its economic recovery.
Before entering Federal service, I was a businessman for 20 years
running the Lillian Vernon company. Lillian Vernon was a small mail
order catalog company my mother started on our family's kitchen table
and it grew into a large publicly traded company. Whether at Lillian
Vernon or the Export-Import Bank, I have always placed a premium on
serving our customers. In providing better service to the Bank's
customers, we have reduced the amount of time it takes to approve
applications and have offered new products to meet the needs of
exporters.
A critical component to job growth is small business, for which
Congress has mandated we make available 20 percent of our financing. In
FY2008 Ex-Im Bank financed $3.2 billion in direct small business
exports. In FY2012 we financed a total of $7.5 billion in small
business exports of which $6.1 billion was direct. Total small business
exports include those directly exported by small business to a foreign
buyer, plus small business inputs into the supply chain of larger U.S.
companies' products which are ultimately exported. At Ex-Im Bank, small
business accounted for 88 percent of all transactions last year and
small business is essential for job growth in coming years.
To address the needs of our small business customers, we have
implemented new products such as Supply Chain Finance to increase
liquidity for small businesses, Global Credit Express for smaller
transactions of half-a-million dollars or less and our most popular
product Express Insurance which received an innovation in Government
award from Harvard's Kennedy School and has helped more than 500 small
businesses get a response to their application within 5 business days.
And we are not stopping there. In April, we launched a new pilot
program called U.S. Global Business Solutions. The program streamlines
U.S. Government trade-finance products for lenders and exporters. The
programs and products will be combined into a single menu of options
tailored to the exporter's needs. Working together, Ex-Im Bank, the
Small Business Administration, and the U.S. Department of Commerce,
make it easier and more cost-effective for exporters and their lenders
to avail themselves of the programs and products of multiple agencies.
The key to expanding exports is marketing and communicating to
small businesses. To increase awareness, Ex-Im Bank has partnered with
the U.S. Chamber of Commerce, the National Association of
Manufacturers, Government agencies, and commercial banks to hold more
than 50 small business forums that we call Global Access for Small
Business. From Billings, Montana, to Shreveport, Louisiana, and from
Charlotte, North Carolina, to San Bernardino, California, thousands of
businesses have learned how to access foreign markets and use Ex-Im
Bank to give them a competitive edge when exporting.
During my tenure at Ex-Im Bank I have worked to ensure that we make
significant progress in supporting our other congressional mandates to
finance more renewable energy exports and exports to sub-Saharan
Africa. Our support for renewable energy has increased more than
tenfold from $30.4 million in FY2008 to $355.5 million in FY2012.
I am proud of our work in sub-Saharan Africa which is home to 7 of
the 10 fastest growing economies in the world. Many countries in sub-
Saharan Africa have developed to the point where they are now eligible
for Ex-Im Bank financing. The Bank has grown sub-Saharan Africa
financing from $576 million in FY2008 to $1.5 billion in FY2012. While
Ex-Im Bank supports approximately 2 percent of all U.S. exports, we
financed approximately 7 percent of all U.S. exports to sub-Saharan
Africa.
Lastly, if confirmed, I will ensure that the Bank continues its
prudent oversight and due diligence standards to protect taxpayers. As
a result of provisions inserted into the Bank's charter during last
year's reauthorization, every 90 days Ex-Im Bank submits a default rate
report to Congress. I am pleased to inform you that our most recent
report dated March 31, 2013, showed a default rate of 0.307 percent. In
addition to this low default rate, over the past 5 years Ex-Im Bank has
generated $1.6 billion for U.S. taxpayers, above and beyond all
administrative operating costs, claims, and loan loss reserves we have
set aside. We operate at no cost to the taxpayers and actually generate
revenue for them while supporting U.S. jobs.
As a businessman myself, I know U.S. companies still need to
compete globally on the basis of price and quality. The world wants
services and products that are made in America. If confirmed, I will
continue to work with Congress, the Administration, U.S. businesses and
their workforce to enhance competitiveness and support U.S. jobs.
Thank you.
BIOGRAPHICAL SKETCH OF NOMINEE FRED P. HOCHBERG
Fred P. Hochberg is the 23rd president of the Export-Import Bank of
the United States, the U.S. Government's official export credit agency.
President Barack Obama first nominated Hochberg to the position on
April 20, 2009. The Senate confirmed his nomination by unanimous
consent on May 14, 2009, for a term ending on January 20, 2013. He was
sworn in as chairman and president on May 21, 2009. His term was
extended for 6 months, until July 20, 2013. Mr. Hochberg was
renominated by President Obama on March 21, 2013, for a term ending on
January 20, 2017.
Mr. Hochberg has more than 30 years of experience in business,
Government, and philanthropy. From 1998 through 2001, he served as
deputy, and then acting administrator, of the Small Business
Administration. Before joining the Clinton administration, Hochberg was
president and chief operating officer of the Lillian Vernon
Corporation, which was founded by his mother. From 2004 to 2008, he was
a dean at The New School in New York. Hochberg received a Bachelor of
Arts from New York University and a Master's of Business Administration
from Columbia University.
RESPONSES TO WRITTEN QUESTIONS OF SENATOR CRAPO
FROM FRED P. HOCHBERG
Q.1. There is a perception that the Export-Import Bank is
``subsidizing'' a discrete number of very large corporations
which outwardly appear to not need any form of financial
support. The implication is that this constitutes little more
than Government-backed corporate welfare, in its purest form.
Please fully respond to the perception and its implication.
A.1. Thank you for asking this question and giving me an
opportunity to address this common misconception. Ex-Im Bank
does not provide below-market ``subsidized'' rates. In fact,
every financing Ex-Im Bank authorizes is fully consistent with
the rules and principles of the World Trade Organization. Ex-Im
Bank also does not provide aid, but provides financing in the
form of loans, loan guarantees, and credit insurance. We
collect a risk-based premium for this service, similar to
points on a mortgage, which currently ranges from approximately
0.5 percent to 15.5 percent.
Ex-Im Bank is a self-sustaining agency. The fees and
interest we charge customers pay for all operations, claims and
loan loss reserves. We actually turn a profit for the
taxpayers, last year generating $1.1 billion to the U.S.
Treasury.
The charge that our financing of exports amounts to
``corporate welfare'' is false. We finance foreign purchasers
(or guarantee foreign banks and U.S. banks) of U.S. exports,
charging risk-based fees and interest, leveling the playing
field so that American exporters can compete on product quality
and value. With the exception of our U.S. small business and
working capital guarantee programs, we do not provide financing
directly to U.S. businesses; we principally provide financing
support to the foreign purchasers to of U.S. goods and
services.
Q.2. Is the availability of a Bank guarantee encouraging our
domestic private financial institutions to stay out of direct
lending in the export market?
A.2. No. To the contrary our guarantees don't compete with
commercial institutions; they work with them by providing
guarantees to their commercial loans encouraging them to make
loans that their customary credit standards might otherwise
limit. Therefore, Ex-Im Bank only provides guarantees if the
commercial banks are unwilling to lend without our cover. One
of the criteria that the Bank considers as part of its due
diligence is whether the guarantee provided by Ex-Im Bank
results in additional credit required by the commercial
institutions to close a transaction.
More than 80 percent of the Ex-Im Bank's current
outstanding exposure (disbursed but not yet repaid) is
comprised of guarantees of loans by commercial banks. As of
March 31, 2013, the Bank's outstanding exposure is $74.6
billion and of that amount $60 billion is guaranteed lending.
Q.3. In response to the Chairman's question on the ability of
American exporters to acquire private financing in times of
crisis, you replied in part that the Bank tends to be
countercyclical and acts to fill a void during these times. A
few minutes later, however, you were reported by the press to
have said, outside the hearing, that the Bank is unlikely to
reduce its support for U.S. exports as the economy improves.
Can you reconcile the two positions?
A.3. There is no conflict between these two statements.
According to the Census Bureau, exports of goods and
services are up 39 percent since 2009, so it is not surprising
that Ex-Im Bank is being called upon to step up. Banks are
still ``under-lent''--that's their word--and banks increasingly
only finance exports for preferred, well-established customers.
Also it is worth noting that banks are now required by
regulators to reserve more capital for their transactions, even
those covered by Ex-Im Bank or other similar ECAs. So while
commercial banks will re-enter the market, it may not be at
sufficient levels to support U.S. exports. Ex-Im Bank's role is
to fill this gap. Increased exports and a banking system that
remains reluctant to lend to overseas buyers and small
businesses are two reasons why our support may increase even as
the economy improves.
Additionally, more exports are going to the developing
world, where banks have their own self-imposed limits as to
lending into those markets, which means that they will continue
to rely on Ex-Im Bank support to close those sales of U.S.
goods and services. It is critically important to U.S.
companies that they enter these markets early on so they can
capitalize on follow-on sales and build brand loyalty in the
emerging countries.
Small businesses will continue to be challenged in
obtaining sufficient credit, particularly in the developing
world.
Q.4. When the Bank does act on behalf of an overseas buyer,
what steps does the bank take to either mitigate or eliminate
negative economic impact on other domestic manufacturers or
suppliers of services?
A.4. The Bank's actions are always on behalf of U.S. exports
and the related U.S. jobs. Every application submitted to the
Bank is subject to economic impact scrutiny. Staff quickly
determines economic impact applicability and subjects only
those applications that meet stated criteria to detailed
economic analysis. For example, applications valued at $10
million or less seeking support for the export of noncapital
goods and services (e.g., spare parts and commodities), are
screened out early in the economic impact review process.
On the other hand, applications for capital goods and
services exceeding $10 million in Ex-Im Bank financing for
projects that will establish or expand foreign production
capacity (e.g., a petrochemical project) by 1 percent or more
of comparable U.S. production, are subject to detailed economic
impact analyses. For such applications, the Bank: (1) issues a
notice in the Federal Register seeking comments from the
public, (2) prepares an analysis of the likely impact of the
new foreign production on U.S. producers, (3) obtains input
from other USG agencies; and (4) provides the Board with all
relevant information gathered in the three previous steps. In
sum, the Bank has created a transparent and comprehensive
process to evaluate any potential negative impact on U.S.
producers.
The tests used to determine whether a detailed economic
impact analysis is necessary are usually called ``screens'' or
``filters.'' The screens used in the foregoing example are
applied to transactions in which the exported goods or services
are used to manufacture goods. The screens are different for
transactions in which the exported goods or services result in
services rather than goods. Different screens are necessary
because of the inherent differences between goods and services.
Q.5. What will become of the relative distribution of Bank
support in an improving world economy, where private markets
and rates become more attractive to the best credit risks?
A.5. Our goal and mission is to be available only when needed.
As the economy improves, there will be those sectors of the
export economy that will be more adequately served by
commercial banks. Although Ex-Im Bank tends to be
countercyclical, two other factors today are at play--increased
exports and globally a weakened financial system with higher
capital requirements. In a changing global economy the Bank's
portfolio distribution may change reflecting underlying
financial needs. Some sectors may increase their need for Bank
financing while others may decrease. We will also be challenged
to finance more marginal credits that remain less attractive to
banks--that is to countries that are hard to finance and
products that are difficult to finance. While we may face more
marginal transactions, that will not change our extensive due
diligence and underwriting practices. Thanks to our stringent
underwriting and aggressive collection processes, we have a
very low 0.307 percent default rate as of March 31st.
Q.6. The 2012 reauthorization required the Government
Accountability Office (GAO) to review the Bank's risk
management practices to determine what if any inherent risks
there are to the American taxpayer. The report was issued in
March 2013.
Are you willing to accept and implement procedures or
processes for each of GAO's recommendations?
A.6. Yes. The Bank provided a very inclusive and transparent
review of our risk management practices for the GAO. Ex-Im Bank
proactively manages risk and is committed to continuous
improvement. The Bank agreed with each GAO recommendation on
this audit and began this fiscal year to implement of all of
the Recommendations for Executive Action identified in this GAO
audit. Ex-Im Bank will report the implementation status to the
U.S. Congress and the GAO within 120 days after officially
receiving the Comptroller General report.
Q.7. What are the specific steps that you will take to improve
the Bank's risk-management framework, particularly in light of
the bank's large volume of recent transactions?
A.7. The Ex-Im Bank has been developing a comprehensive risk
management framework, recognized by the GAO, which proactively
manages risk and is committed to continuous improvement. Ex-Im
Bank believes that a comprehensive risk management framework
minimizes claims.
First, the Bank already has in place risk-rating systems
with stringent credit underwriting procedures for its short,
medium, and long term transactions. These credit standards and
risk rating methodologies are applied to transactions under
review to determine whether they qualify under Ex-Im Bank's
Charter requirements of reasonable assurance of repayment prior
to presenting the transaction for final approval.
The risk rating system is also complemented by a country
risk evaluation from Ex-Im Bank's in-house country risk
evaluation team. Country-risk criteria and risk rating
standards applied are the same as the criteria shared and
applied by all other USG agencies in their lending protocols.
Additionally, the Bank is very proud of the risk management
improvements made during the past few years, improvements that
protect the U.S. taxpayer. Recently, the Bank has implemented
the following important improvements:
streamlining of credit monitoring functions,
enhancing the sharing of information and risk
evaluation within the Bank to insure sound credit
decisions are made,
evaluating existing programs,
creating a Special Assets Unit to address emerging
credit issues,
updating the Bank's Credit Manual, and
using qualitative factors to improve the Bank
credit-loss models.
These recent improvements are consistent with industry best
practices. In fiscal year 2012, the Bank paid $37 million in
gross claims on a portfolio of $106 billion. Ex-Im Bank
recovers approximately 50 percent on all claims paid, far above
commercial bank averages. On March 31, 2013, Ex-Im Bank
reported a default rate of 0.307 percent.
The Bank is also committed to further improvements in our
risk management practice. To foster the development of
enterprise risk awareness, Ex-Im Bank plans to establish an
Enterprise Risk Committee (ERC) comprising senior management
from the business, financial, legal, policy, resource, and risk
management areas.
Thanks to Congress, the Bank is also making significant
investments to modernize its IT systems and business processes,
including the modernization of the Asset Monitoring System. Ex-
Im Bank also is committed to analyzing workload capacity
benchmarks on a product and functional basis. This operational
risk analysis will allow the Bank to better evaluate its
ability to support incremental transactions given current
resource allocations. Additionally, the Bank will continuously
evaluate and seek to improve our underwriting, monitoring, and
recovery efforts using best practices. Ex-Im Bank has a
comprehensive risk management framework that proactively
manages risk and is committed to continuous improvement.
Q.8. I have long been concerned on this Committee with the
situation of small business exporters. Since 2002, Congress has
required that the Bank make available at least 20 percent of
its annual financing to such business.
What steps is the Bank taking to attract more small
business participation, and how effective are those steps?
A.8. I have made small business a key priority during my tenure
at Ex-Im Bank. Having run a small family business for 20 years
that grew into a large publicly traded company, I know the
vital role small businesses play in our economy both through
direct exports and through inputs added to other goods for
export. Having also served as Deputy Administrator of the Small
Business Administration (SBA) and later as Acting
Administrator, I have a deep knowledge and commitment to small
business.
I am proud of the progress Ex-Im Bank has made over the
past 4 years. In 2008 the Bank supported $3.2 billion in direct
small business exports. Thanks to a number of new options for
small businesses, we have grown that number to $7.5 billion in
FY2012, of which $6.1 billion was direct exports.
In fact, Ex-Im Bank financed more small business exports in
the last 4 years than it did in the previous 8 years.
Ex-Im Bank has taken aggressive steps on three critical
tracks for growing small business:
Expanded Visibility
Ex-Im Bank has developed the Global Access Forums which
bring together exporters, representatives of Federal exporting
agencies and local banks. These half day forums which are
delivered nationally provide product information and contacts
for facilitating export transactions. Over 50 of these have
been done, with several thousand attendees.
New Financial Products That Fit the Need
Global Credit Express
This fills a critical gap in the market, offering small
export working capital loans (up to $500,000) to high quality
credit with limited assets and capital, typically service
businesses.
Express Insurance
This simplified policy requires only a one-page application
and free credit reports, and are answered within five days.
Since it began in April 2011, we have generated 579 policies in
the amount of $278 million using 48 brokers. This received the
Bright Ideas in Government Award from Harvard's Kennedy School
of Government in 2012.
Supply Chain Finance
This can cut borrowing costs for small business suppliers
by more than half while helping them manage cash and their
relationships with their largest customers. Initiated in 2010,
there have been five SCF transactions that have authorized
$1.2B in available low-cost advance funding to small business
suppliers.
Expanding Partnerships With Institutions That Serve Small Businesses
Together with the SBA, Commerce, the USTDA, USDA, and OPIC,
Ex-Im Bank has established:
Global Business Solutions
This pilot program aims to increase the number of small
business exporters by 50,000 by December 2017--after enlisting
250 banks to provide trade finance services to their clients by
December 2015.
It offers two simple menus of products and services from
the export agencies that are targeted for specific segments of
the small business and small-business lending sectors: the
Global Business Solutions for high volume mainstream earlier
stage businesses, and the Specialized Global Solutions for more
advanced businesses and lenders.
It involves 40 experienced export finance managers
nationally selling the same products and services, shared
marketing and training for small business lenders and their
clients beginning in June, 2013, and interagency referral
platform and data base for ensuring optimal service and
tracking.
Establishing Infrastructure
Ex-Im Bank has created the Exporter Evaluation risk scoring
system, which enables the Bank to deliver its trade credit
insurance approvals much more rapidly and systematically. Since
2010 average turnaround has dropped from 30 days to 15 in trade
credit insurance, partly as a result of this innovation.
Q.9. What challenges is the Bank facing in its effort to
increase small business participation, and what more could be
done?
A.9. In Fiscal Year 2012, 88 percent of Ex-Im Bank's
transactions were for small businesses. Historically the
biggest market for the small business has been right here in
the U.S. and, as a result, many small businesses saw little
need to export. In the last decade this has changed as domestic
growth has slowed while accelerating abroad. Today, 95 percent
of the world's customers live outside the United States and, to
be more competitive, small U.S. businesses need to tap into
that market.
As more small businesses discover demand for their products
and services and the need to go overseas, they find that their
lenders and service providers are often not up to speed on the
products and services they need to successfully export. This is
why we created Global Access Forums, to educate small
businesses on the financial tools they need to effectively
compete overseas.
For example, Jenny Fulton was a laid off stock broker in
North Carolina. As a result, she decided to start canning Miss
Jenny's Pickles and selling them to local grocers. Jenny came
to one of our Global Access Forums, heard my presentation about
how we work with small businesses so they can export their
products utilizing modern credit tools, such as accounts
receivable insurance. As she stated on 60 Minutes recently,
that is what inspired her to begin exporting as she grew her
company. Jenny became Ex-Im Bank's 500th Express Insurance
customer and now she is exporting to China, Mongolia, Canada
and other countries.
Aside from getting the word out to small businesses as to
how we can help them export, we need to educate U.S. banks
about our services. Historically, the trade finance disciplines
have been separate from the small business finance disciplines
at most banks and this separation is largely consistent across
the banking community. In order to bridge the gap, we have made
trade finance products and services fit the specific needs of
small businesses and the platforms that their lenders have
developed to serve them. This is the primary goal of the Global
Business Solutions program developed by the Export Promotion
Cabinet.
Q.10. U.S. companies increasingly are challenged by subsidized
export financing from China and other non-European countries.
What are some examples of nontraditional financing terms
used by China and these other countries to induce buyers to
purchase its products?
A.10. From Ex-Im Bank's perspective, any export financing that
does not conform to the terms and conditions set forth in the
OECD's Arrangement on Officially Supported Export Credits are
considered to be ``Nontraditional.'' Therefore, nontraditional
officially (Government) supported export credits can come from
both OECD and non-OECD countries. For example, the Canadian
ECA, Export Development Canada (EDC), an OECD member, offers
``market window'' financing that EDC states are available terms
that mirror the private market (e.g., interest rates, repayment
terms). Because of the ``market'' nature of the market-window
financing, this form of financing is not covered by the OECD.
As such practices are not subject to OECD reporting, Ex-Im Bank
has no specific examples to share.
Another form of financing that is utilized commonly in
Asia, but is not covered by the OECD Arrangement is ``untied
financing'' which by its very nature is not supposed to be tied
to exports, and therefore falls outside the scope of the OECD.
However, Ex-Im Bank has received numerous allegations of lost
sales due to untied financing.
Regarding China, China Eximbank provides export credit
financing on what appears to be both OECD compliant and non-
OECD compliant terms. However, China is not a member of the
OECD so it is not required to conform to the OECD guidelines.
As a result, the terms of their financings are also not as
transparent as OECD compliant loans.
In one case, Ex-Im Bank offered to match a China Eximbank
offer in 2010--Pakistan Rail valued the contract at $477
million. U.S. exporters were competing with Chinese locomotive
manufacturers. It was reported to us that China was offering
financing terms more generous than generally allowed by OECD
rules. China, however, refused to reveal the precise terms of
their financing offer, a practice OECD members are required to
follow. To level the playing field so that U.S. manufacturers
could fairly compete for the order, Ex-Im Bank made available
off setting financing terms. In this way, Pakistan Rail could
choose the locomotive best suited to their needs and not
influenced by nontraditional or one-off financings.
In this transaction, Ex-Im Bank offered to match the
Chinese financing of 91 percent of the contract (versus our
usual 85 percent); charge a risk premia of 8.2 percent which is
lower than the 21 percent OECD premia would have been, and
matched extended repayment terms of 12 years (versus OECD's 10
year financing).
Q.11. What measures does the Bank employ to ``level the playing
field''?
A.11. In support of U.S. jobs, Ex-Im Bank makes available
financings to off-set those export credits that foreign
Governments provide for their exporters. Ex-Im Bank, acting as
the official export credit agency (ECA) of the U.S., actively
participates in the OECD discussions and negotiations. These
negotiations establish the principles, disciplines and
practices allowable by Governments that seek to minimize the
use of export credit subsidies and to ensure a level playing
field by preventing a ``race to the bottom'' by different
countries. The OECD employs the principle of transparency as
the central policing mechanism in which ECAs are expected to
notify and provide an explanation when they intend to deviate
from the standard guidelines. If Ex-Im Bank or any other ECA
determines that the proposed terms are inappropriate, they can
challenge the offering ECA with the expectation that the terms
will be made compliant, and if not, other ECAs can match those
terms to ensure a level playing field.
A similar process is followed when a noncompliant financing
offer is alleged to exist from a non-OECD member. The Pakistan
case referenced previously is an example.
Finally, Ex-Im Bank also requires applicants to provide the
basis for their request for Bank support: to meet foreign ECA
completion and/or private financing is not available. If the
financing is needed to meet competition, Ex-Im Bank staff
collects as much information on the alleged competition as
possible in an attempt to confirm. This information is required
to be included in the Board memo presented for the board of
directors' approval consideration.
------
RESPONSES TO WRITTEN QUESTIONS OF
SENATOR MENENDEZ FROM FRED P. HOCHBERG
Q.1. I am pleased Ex-Im Bank has had a carbon management policy
in place for several years. As you know, expanding renewable
energy exports and increasing support of exports that produce
fewer greenhouse gas emissions in energy production not only
increases U.S. competitiveness but also improves our
environment. However, implementation of this policy has been
inconsistent and I have concerns over some of Ex-Im Bank's
fossil fuel projects, including projects that could have
significant environmental and public health impacts.
What is Ex-Im Bank doing to better monitor carbon dioxide
emissions reporting from projects it finances?
A.1. Ex-Im Bank has made renewable energy exports and
environmentally beneficial products and services a top priority
of the Bank. In fact, there is a team of people solely
dedicated to this effort. Additionally, Ex-Im Bank is the only
export credit agency (ECA) that publicly discloses the expected
amount of carbon dioxide relating to the applications for
financing covering all projects that are expected to produce
more than 50,000 tonnes per year. When the Bank adopted
Environmental Guidelines applicable to high-carbon intensity
power plant projects in March 2010, it did so only after
vetting the proposed guidelines with environmental NGOs as well
as U.S. exporters.
To date, the Bank has reviewed three high-carbon intensity
projects under these guidelines, all of which were power plants
fueled by coal. Following a review of these projects against
the guidelines for high-carbon intensity projects, the Board
authorized financing for two of the projects (coal-fired power
projects in South Africa and in India) and a financing decision
for the third (a coal-fired power plant proposed for a large
copper mine in Mongolia) remains pending.
In all cases, Ex-Im Bank's support has helped sensitize the
buyers to address low-carbon growth strategies. In the case of
India, the Bank has already provided financing for numerous
solar and renewable energy projects. During 2010, I met with
Environmental NGOs and discussed their concerns about the
projects in India and South Africa. Their concerns were taken
into account in the Bank's decision to proceed with financing
of these projects, which will help to meet the increasing
demand for electric power in these countries. The Bank is
carefully monitoring the construction of these projects, and
when they become operational, the Bank's staff will conduct a
rigorous monitoring regime of their environmental performance,
including the level of carbon dioxide emissions. The Bank has
taken measures to address concerns raised by NGOs last year
relating to environmental and social compliance issues of the
SASAN project in India.
Q.2. What measures are being taken to encourage foreign buyers
to reduce the impact of fossil fuel projects?
A.2. Ex-Im Bank is the only ECA in the world that has special
environmental guidelines addressing high-carbon intensity
projects applicable to coal-fired power plants. These
guidelines impose requirements on foreign buyers that are
intended to sensitize them to the environmental effects of such
projects, while encouraging them to address low-carbon
alternative projects such as solar and wind energy. The
guidelines include requirements for offsets for projects having
very high-carbon intensity levels, the preparation of an
analysis demonstrating that low-carbon alternatives to the
project were addressed, and information showing that the
project, as designed, is employing the best appropriate
technology with respect to carbon emissions.
In 2010, the Board of Directors initially voted to withhold
financing for U.S. exports destined for the SASAN coal-fired
power project in India, based on the project's high-carbon
intensity and its projected levels of carbon dioxide
production. Shortly after this action the owner of the project
both improved the performance of the power plant and informed
the Bank that it was prepared to commit to build solar power
projects totaling 250 MW in capacity. With this new information
stating the buyer's commitment to invest in renewable energy,
the Board of Directors reviewed for a second time the
transaction's impact on greenhouse gas production and it
subsequently voted to finance the project. I am pleased to
report that Ex-Im Bank has already supported U.S. exporters
involved in several solar projects for this buyer, totaling
approximately 150 MW. Furthermore, it has financed more than
250 MW in solar energy projects throughout India since 2010,
and we continue to address applications for renewable energy in
that market.
Ex-Im Bank also offers financing incentives specifically
applicable to renewable energy projects, incentives that
include financing repayment terms that can be extended to 18
years, well above the maximum terms available to conventional
power projects. These financing incentives have helped the Bank
increase its portfolio of renewable energy projects by hundreds
of millions of dollars since 2008. In the case of India and
South Africa where Ex-Im Bank provided financing for coal-fired
power plants, those plants would have gone forward with or
without Ex-Im Bank financing. However, through the leverage it
has gained by applying its high-carbon intensity guidelines to
these projects, Ex-Im Bank believes that the projects will be
operated in a more environmentally responsible manner, with
measures taken to control the level of greenhouse gases that
they will produce. Finally, there continues to be evidence that
the owners of these projects are also directing more attention
and resources to the development of alternative low-carbon
producing projects.
Q.3. As you know, the Equator Principles were agreed to by over
70 financial institutions, including Ex-Im Bank, setting
standards to assess and manage social and environmental risks
in financing projects. How have these standards been applied to
Ex-Im Bank's work?
A.3. Ex-Im Bank has integrated the Equator Principles into its
Environmental Procedures and Guidelines. Before joining the
Equator Principles the Bank's environmental specialists and
staff from its Office of the General Counsel interfaced
extensively with members of the various committees of the
Equator Principles Financial Institutions to ensure that Ex-Im
Bank understood and was prepared to properly implement the
various standards and procedures of the Equator Principles.
The Bank successfully implements and manages the Equator
Principles standards on all transactions covered by these
Principles. For example, the Bank requires, and conducts due
diligence to ensure that all projects structured as project
finance comply with the Performance Standards on Environmental
and Social Sustainability of the IFC, as required by the
Equator Principles, and it engages independent environmental
and social consultants to advise the Bank on elements
pertaining to the environmental and social risk and impacts
associated with the project.
In addition, in keeping with procedures of the Equator
Principles, Ex-Im Bank disclosed the environmental
categorizations of all the project finance transactions it
authorized during 2012, and it included the appropriate
environmental and social covenants in the financing documents
of these projects in compliance with the Equator Principles.
Finally, Ex-Im Bank staff, including its Environmental
Specialists, continue to participate in committees with other
members of Equator Principles as they work to prepare a third
revision to the Principles, and to that end the Bank currently
cochairs the Equator Principles Association's Climate Change
Working Group to promote further measures to advance the level
of environmental stewardship among members of the Equator
Principles.
Q.4. As you know, greenhouse gas pollution has the same impact
on global warming regardless of the point of origin. Further,
the EPA is currently working on greenhouse gas emission rules
for new power plants. Should we apply those same rules to power
plants you finance?
A.4. While we work to encourage ECAs around the world to follow
more stringent environmental rules, many of them operate under
their own rules and regulations, while other ECAs like Ex-Im
Bank operate within the framework of the Organization for
Economic Cooperation and Development (OECD).
Ex-Im Bank works to support U.S. jobs by ensuring a level
playing field for U.S. exporters competing for foreign
projects. The Bank is negotiating with other Export Credit
Agencies within the OECD to establish common guidelines to
address climate issues that would be applicable to all high-
carbon intensity projects.
This is a strategy similar to that adopted by Ex-Im Bank
over 15 years ago at the OECD which resulted in the
ratification by all ECAs of a common set of environmental
guidelines applicable to all projects that are based on the
environmental standards of the World Bank Group.
When we participate in financing projects, we are in a
position of influence and can negotiate to improve the
environmental performance of those projects, which in
practically all cases, would be built anyway, possibly without
U.S. exports or environmental improvements.
Q.5. I am also pleased to see in your official testimony that
the Export Import Bank is focused on supporting the President's
National Export Initiative goal of doubling U.S. exports by the
end of 2014, and that Ex-Im Bank is promoting export
opportunities with U.S. companies, including through its
initiative, ``Global Access for Small Business.'' Ex-Im Bank is
responsible for supporting thousands of U.S. companies and
billions of dollars of U.S. exports of goods and services, and
plays a critical role in our broad effort to increase American
exports. Nevertheless, while total goods and services exports
have increased approximately 40 percent since 2009, supporting
an additional million jobs, this is below the pace we need to
see for a doubling of exports. Furthermore, less than 1 percent
of American companies export their products, and this is well
below the average in other developed economies. I would
appreciate Ex-Im Bank's comments on what it is doing to address
these shortcomings and how the Administration as a whole can do
better on export promotion, especially with small businesses.
A.5. Ex-Im Bank plays an important role, but we are not a
development or aid agency. Ex-Im Bank's role is to fill
financing gaps and level the playing field so exporters can
compete based on the price and quality of their goods and
services. Other agencies including Commerce, TDA, and OPIC
develop markets for U.S. exporters. We finance those who need
us with reasonable assurance of repayment.
Given that 95 percent of the world's consumers are outside
the U.S., it is critical to do outreach, meet foreign
competition, and encourage businesses that are not exporting,
to do so. The Export Promotion Cabinet Report of July 2012,
proposes a segmentation of the small business sector by stage
of development and need, systematically allocating resources to
meet those needs. The Ex-Im Bank role is to deliver finance and
insurance products to the appropriate segments in coordination
with the SBA, Commerce, USTDA, USDA, and OPIC under the Global
Business Solutions program. Ex-Im Bank's internal small
business strategic plan is completely aligned with this formal
consolidated focus of resources and effort. Our new Global
Business Solutions pilot program calls for adding 250 small
business lenders to the trade finance arena by December 2015,
and 50,000 new small business exporters to the current 296,000
by December 2017.
Q.6. With so few American companies exporting, as a percentage
of the total, what actions are Ex-Im Bank and the
Administration taking to educate and orient potential
exporters, what are the main obstacles that inhibit or prevent
American companies from taking advantage of overseas
opportunities, and what legislative, regulatory, or monetary
impediments complicate Government agencies' efforts to increase
exports and support exporters?
A.6. Ex-Im Bank and USG agencies throughout the Administration
are working to support President Obama's National Export
Initiative, which is renewing and revitalizing the efforts of
the U.S. to promote exports abroad. These efforts have been
paying off, as U.S. exports of goods and services reached an
all-time high, totaling $2.2 trillion in 2012--which represents
39.7 percent above the level of exports in 2009 (according to
Department of Commerce released figures). However, despite the
success to date of the National Export Initiative, there are
many U.S. companies that are still not capitalizing on the
opportunities that exist abroad, and Ex-Im Bank and the
Administration have more to do in order to reach these U.S.
companies to educate them about how selling overseas can grow
their companies and increase jobs.
To help get the word out to small businesses around the
country, Ex-Im Bank has developed Global Access Forums, which
bring together exporters, representatives of Federal exporting
agencies and local banks. These half-day forums, which are held
across the Nation, provide product information and contacts for
facilitating export transactions. More than 50 of these have
been done, with several thousand attendees, including forums in
Newark and West Long Branch, New Jersey. When small business
owners come to a Global Access Forum and they hear from other
businesses in the local area that are exporting using our
services, they see that they too can overcome the fear of
exporting.
Every month I send a letter to the Members of Congress and
governors whose States or districts we have provided financing.
In addition, I have spoken at National Governors' Association
annual conferences and National Conference of Mayors to help
educate them about Ex-Im Bank's programs and how they can help
their constituent businesses export.
In addition, Ex-Im Bank has undertaken a number of other
measures to bring awareness to U.S. companies of how its
products and services can help mitigate the risks of doing
business aboard. The Bank's efforts include:
dedicating a Web portal to educate small business
customers on the Bank's resources and linking
prospective exporters to BusinessUSA to inform them of
the resources of other USG trade agencies,
hosting Ex-Im 101 seminars open to members of the
public in order to learn more about the Bank,
leveraging partnerships with cities and States
entities in order to leverage the Bank's resources and
expand its reach into more regional markets,
hosting outreach listening sessions with local
business leaders across the country to talk about
exporting, and
opening four new regional offices in the last year
in order to expand Ex-Im Bank's direct reach to more
small businesses around the country.
In addition, Ex-Im Bank is an active participant in
interagency efforts to raise awareness of export opportunities.
These efforts include:
working with Commerce on the BusinessUSA and
export.gov Web portals,
supporting Commerce's Doing Business in Africa
domestic exporter outreach campaign,
partnering with SBA and Commerce on the Global
Business Solutions program to co-offer products and
services,
assisting with U.S. commercial trade advocacy
efforts with foreign Government officials abroad, and
participating with Commerce in trade missions and
the sharing of trade leads.
Through its outreach efforts to U.S. companies, Ex-
Im Bank has learned of certain obstacles that inhibit
companies from taking advantage of opportunities
abroad. These obstacles include access to capital, the
uncertainties of doing business in riskier markets
abroad, knowledge of opportunities that exist in
foreign markets, and fear of doing business in
countries where the American exporter does not know the
system. Getting the word out about how Ex-Im Bank can
give exporters peace of mind when exporting, and can
help alleviate some of these concerns. For example,
small businesses know how to follow up and get paid if
they are selling to New Jersey or New Mexico, but they
often don't know what to do if they are selling to New
Delhi or New Zealand. That is where Ex-Im Bank comes
in.
Budgetary concerns are another impediment complicating Ex-
Im Bank's efforts to support U.S. exports. Ex-Im Bank is a
self-sustaining agency that has generated nearly $1.6 billion
in excess revenues above and beyond all operating expenses,
loan loss reserves, and claims. If Congress would allow the
Bank to retain more of the money it earns, we would be able to
increase our efforts to reach small businesses and continue to
generate significant revenues for taxpayers.
While we are best equipped to speak only to the efforts of
the Ex-Im Bank to reach more U.S. companies as well as the
obstacles that Ex-Im Bank is aware of that inhibit American
companies from taking advantage of overseas opportunities--
other agencies would certainly be able to contribute thoughts
to this important conversation.
Q.7. Promoting exports and supporting U.S. companies involved
in exporting requires a whole-of-Government approach, including
such agencies as the Departments of State and Commerce, USTR,
the Overseas Private Investment Corporation, the U.S. Trade and
Development Agency, and many others, in addition to Ex-Im Bank.
However, it is not always clear that the whole is greater than
the sum of the parts and that all of these agencies are
coordinating in a comprehensive effort to support exporters
along the entire value chain. I would appreciate, therefore,
your candid assessment of how well U.S. Government agencies are
doing collectively to identify opportunities in overseas
markets, promote these opportunities domestically, support U.S.
exporters' efforts to take advantage of these opportunities,
and then ensuring their overseas business deals are supported
and protected. How does Ex-Im contribute to this process?
Please explain the coordination procedures and mechanisms with
other key agencies, and what initiatives are Ex-Im and the
Administration doing to improve our success rate?
A.7. Given the collective efforts of the U.S. Government to
help support an all-time record level of U.S. exports, the work
of the U.S. Government to help identify opportunities, promote
them domestically, support U.S. exporters, and advocate for
them aboard has been a huge success. However, we are committed
to ensuring an even larger share of our companies are
capitalizing on the opportunities aboard as well.
To address the needs of U.S. exports and enable them to
compete effectively, the Bank has many innovative tools to
provide U.S. companies with a competitive advantage, including
capital markets financing, cofinancing, and direct loan
products. In addition, the Bank has helped U.S. companies
identify opportunities by focusing its business development
efforts on key markets abroad--which allows for stronger
foreign Government engagement, fosters an awareness of Ex-Im
Bank by foreign buyers in key markets and demonstrates the
strong backing of the U.S. Government in support of its
companies.
There are several coordinated mechanisms and procedures
with key trade agencies to help improve our success rate.
First, through the President's Export Council, Ex-Im Bank
participates in high-level engagement with the business
community, other key agencies and Members of Congress in order
to work to further identify priorities and initiatives. At the
conclusion of 2012, the President's Export Council published a
report making recommendations to the USG and which tracked the
progress of identified priorities.
Second, through a number of coordinated interagency groups
spearheaded by Commerce, the Bank shares information on its
engagement abroad, including trade leads and advocacy
priorities.
Third, Ex-Im Bank is an active participant in trade
missions and other USG conferences and summits, both
domestically and abroad, in order to make available the
coordinated resources of the U.S. Government to support the
efforts of U.S. companies.
Fourth, the Bank is working with key agencies to copromote
(both domestically and abroad) its products and services,
thereby capitalizing on the collective resources and reach of
the USG.
A few illustrative examples of this work include:
1. a joint effort by SBA, Commerce and Ex-Im Bank to
copromote the products and services offered by each
agency in offices all around the country; and
2. work with State to better train foreign commercial
service officers in Ex-Im Bank product offerings to
better enable them to identify trade leads and speak
directly the Bank's resources in the market
3. the opening of the U.S.-Africa Clean Energy Development
and Finance Center, an initiative by USTDA, OPIC, and
Ex-Im Bank to provide a coordinated approach to clean
energy project development in sub-Saharan Africa
Coordination and communication among the various agencies
that support exports is also critical. Each month, along with
my counterparts from USTR, Commerce, TDA, State, and OPIC, I
meet to discuss pressing issues and ensure that we update each
other regarding problems or progress at the various agencies. I
am also a part of the Trade Promotion Coordinating Committee
(TPCC), an interagency task force that meets regularly and to
ensure s the coordination and development of a Government-wide
export promotion plan. It is comprised of 20 agencies with a
core of seven agencies--Ex-Im Bank, Commerce, OPIC, TDA, State,
USDA, and SBA.
Ex-Im Bank also works closely with the State Department
overseas where the Foreign Commercial Service officers promote
Ex-Im Bank and send referrals to the Bank. Also, most of Ex-Im
Bank's field offices are colocated with Commerce Department and
SBA offices, which provides cost efficiencies as well as
increased communication and one-stop services for customers.
Under the Global Business Solutions pilot, Ex-Im Bank is
marketing seven services provided by Commerce and the USTDA
that specifically help small businesses develop export
strategies, get market research, identify buyers, research
buyers, visit target countries, and meet buyers. Together with
the SBA, Ex-Im Bank targets the users of these services with a
menu of products that cover the full range of financing needs
from purchase orders to investment in plant and equipment.
Q.8. Export Credit Agencies (ECAs) are the largest source of
official financing for developing countries. Increasingly, many
Governments of emerging market countries are using their own
ECA's to promote exports of goods and services. However, many
of these ECAs operate outside of global coordinating
mechanisms, such as the OECD arrangement on export credits. Is
this a concern for ensuring that American exporters enjoy a
level playing field when competing in overseas export markets,
and what actions is the Administration pursuing to ensure that
all ECAs play by the same rules?
A.8. Yes, emerging market country activity is growing in scope
and scale. A number of these foreign Government-supported
programs are outside the scope of the OECD rules. They are
difficult to monitor since the terms and conditions of their
financings are generally not transparent yet at the same time
they have a direct impact on the ability of U.S. exporters to
compete.
Activity by these non-OECD member emerging market exporters
ranges between a conservative estimate of $53.8 billion to a
higher estimate of $83.8 billion. Ex-Im Bank has examined these
programs and has tried to identify their implications in its
2011 Competitiveness Report and will further inform Congress of
its findings in the 2012 report due June 30.
Following up on discussions with President Obama and now
President Xi Jinping of China in 2012, the U.S. and China
started bilateral discussions on a new order of export credit
parameters that has now turned into multilateral negotiations--
the International Working Group (IWG). The goal is to have some
framework agreed to by 2014.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR VITTER
FROM FRED P. HOCHBERG
Q.1. Please submit any and all economic analysis documents on
harm to any other U.S. companies that was conducted all wide
body aircraft financing done in 2012.
A.1. The Economic Impact Procedures for aircraft went into
effect on April 1, 2013. In 2001, the Bank considered the lack
of any U.S. airline concern for the preceding 15 years to be a
sufficient basis for introducing--purely as an operating
efficiency measure--a screen that filtered all airline
purchases of aircraft from any consideration of detailed
economic impact analysis. Hence, in 2012 the applicable Ex-Im
Bank economic impact procedures precluded there being any
detailed economic impact analysis done on any wide-bodied
aircraft authorized in that year. As such, there were no
economic analyses done on any wide-body aircraft transactions
in 2012 and therefore there are no documents on harm to U.S.
companies from this period we are able to provide.
Q.2. In your past Testimony Mr. Hochberg, you stated that the
Bank's ``prudent oversight and due diligence standards'' is
limited to monitoring the default rate. I would have a
different opinion, I would say that your prudent oversight and
due diligence should also include ``insuring that full
consideration is given to the extent to which any loan or
financial guarantee is likely to have an adverse effect on U.S.
industry or employment.'' Can you please explain why that is
not a part of your interpretation?
A.2. To be absolutely clear, I never made the statement that
oversight and due diligence standards ``are limited to
monitoring the default rate.'' Those are your words that you
have attached to a small snippet of my testimony. For the
record and to provide factual context to your question, my
testimony was:
Lastly, if confirmed, I will ensure that the Bank
continues its prudent oversight and due diligence
standards to protect taxpayers. As a result of
provisions inserted into the Bank's Charter during last
year's re-authorization, every 90 days Ex-Im Bank
submits a default rate report to Congress. I am pleased
to inform you that our most recent report dated March
31, 2013, showed a default rate of 0.307 percent. In
addition to this low default rate, over the past 5
years Ex-Im Bank has generated $1.6 billion for U.S.
taxpayers, above and beyond all administrative
operating costs, claims and loan loss reserves we have
set aside. We operate at no cost to the taxpayers and
actually generate revenue for them while supporting
U.S. jobs.
I have always held the position that prudent oversight and
due diligence standards encompass a wide array of factors, not
simply monitoring the default rate. The low default rate,
however, is the ultimate test of the Bank's due diligence. The
Bank's due diligence includes wide gathering of financial and
nonfinancial information, including information related to both
relevant environmental and economic impact considerations.
The Ex-Im Bank has a comprehensive risk management
framework that we believe minimizes claims. This framework
starts with strong underwriting and documentation and continues
with proactive monitoring and, if necessary, with aggressive
recovery efforts. Ex-Im Bank is very proud of our efforts in
these areas, efforts that in fiscal year 2012 resulted in the
payment of $37 million in gross claims on a portfolio of $106
billion while collecting $1 billion in fee income. The Bank has
a current default rate (March 31, 2013) of 0.307 percent and
recovery efforts of approximately 50 percent on all claims
paid. These results are due to the Bank's prudent oversight and
due diligence standards.
Separately, the Bank also has comprehensive, transparent
procedures to evaluate the potential economic impact of a
transaction on U.S. industries and employment. This is an
important part of the Bank's procedures, but is separate from
its credit risk analysis.
Q.3. Under what circumstances, other than bad credit, should
the Bank deny an application for financing? Can you give me an
example of a situation where the Bank would deny an
application?
A.3. Our Charter instructs us to review applications for
financing for a list of reasons, including creditworthiness,
adverse economic impact on the U.S. economy, consistency with
U.S. law (most notably our prohibition against financing
defense articles and prohibition against financing sanctioned
countries) and environmental concerns. Under language added to
its Charter in 1993, the Bank was directed to establish
environmental procedures that permitted the Board of Directors
to withhold financing from a project for environmental reasons
or to approve financing after considering the potential
environmental effects of a project.
In 2010, the Board of Directors initially voted to withhold
financing for U.S. exports destined for the SASAN coal-fired
power project in India, based on the project's high carbon
intensity and its projected levels of carbon dioxide
production. Shortly after this action, the owner of the project
informed the Bank that is was prepared to commit to building
solar power projects totaling 250 MW in capacity. With this new
information stating the buyer's commitment to invest in
renewable energy, the Board of Directors reviewed for a second
time the transaction's impact on greenhouse gas production and
it subsequently voted to finance the project. I am pleased to
report that Ex-Im Bank has already supported U.S. exporters
involved in several solar projects for this buyer, totaling
approximately 150 MW. Furthermore, it has financed more than
250 MW in solar energy projects throughout India since 2010,
and we continue to address applications for renewable energy in
that market.
Over the years there have been few explicit denials on
economic impact grounds, but several major cases never made it
through the application process. Perhaps the most noteworthy
are a D-RAM project in Singapore (SMIC) where the proposed
facility would have competed with U.S. production in Idaho and
other locations. Members of the Senate Banking Committee and
others raised concern about the facility. After the Bank's
consideration of these concerns the application was withdrawn
and D-RAM was added to Ex-Im Bank's Sensitive Sectors List.
Q.4. Do you read the economic-impact provisions in the Bank's
statutory charter as requiring the Bank to conduct economic
impact analyses? Or are you free to ignore those provisions?
A.4. We adhere to all statutory requirements in our Charter.
Indeed I read the economic impact provisions in the Bank's
statutory Charter as requiring the Export-Import Bank to
consider in all transactions the extent to which a transaction
is likely to have an adverse effect on industries; but to
conduct a detailed economic impact analysis on only those
transactions where there is a likelihood of substantial adverse
economic impact. In FY2012, 88 percent of all transactions were
for small business. Detailed economic analyses take a long time
to conduct and require significant staff resources. If a
detailed economic analysis were required on every transaction,
the potential for lost export sales would be enormous; foreign
buyers would simply purchase their goods and services from a
foreign source where their ECA financing does not require such
analysis. The result would be a significant loss of U.S. jobs
in States like Louisiana, where since 2007 Ex-Im Bank has
authorized $10 billion in transactions to 143 exporters, 85 of
which are small businesses.
Accordingly, all applications are subject to filters
designed to: (i) identify those cases associated with specific
legislative prohibitions (e.g., cases in which trade measures
are applicable), and (ii) determine what applications have the
potential to cause substantial injury to the U.S. industry
(when the new foreign production equals or exceeds 1 percent of
comparable U.S. production).
Q.5. There are some who say you shouldn't be reconfirmed
because you are ignoring the letter and definitely the spirit
of the Ex-Im reauthorization bill specifically around
conducting economic analysis on transactions where there may be
economic harm to another U.S. Company, what would you say to
that charge?
A.5. I would respectfully disagree with them. I would tell them
that no other ECA in the world is as transparent as Ex-Im Bank
is. We have policies to protect U.S. businesses from
significant economic harm and we follow them judiciously.
The Export-Import Bank has always followed both the
historical letter of its Charter language on the nature and
scope of its economic impact responsibilities, as well as
embraced the spirit of those Charter provisions. The Bank has
had economic impact procedures in place for approximately 40
years and widely published for approximately 15 years. The Bank
from time to time updates and modifies those procedures to
accommodate changing circumstances. For example, the Bank has
worked over the past year to update and implement our revised
economic impact procedures. The Economic Impact Procedures and
Methodological Guidelines approved on November 19, 2012, were
developed by Bank staff and widely vetted with stakeholders and
relevant USG agencies. They are available for the entire world,
including our competitors, to see.
The current procedure updates the economic impact mandate
by: (1) explicitly defining the purpose of the economic impact
mandate; (2) codifying the principles that guide the
implementation of all economic impact reviews; (3) publishing
the analytical methodology that introduces flexibilities to
address the limitations of a ``one-size fits all'' approach;
and (4) reintroducing services (specifically passenger airline
services) in the scope of the detailed economic impact
analysis.
Q.6. Does Ex-Im plan to protect the U.S. airline industry from
both predatory competitive practices of foreign airlines (State
ownership, subsidies, etc.) and the benefits of Ex-Im support
when it finances aircraft?
A.6. Our mission is to support U.S. jobs created or sustained
by export sales that require our financing and meet our
eligibility standards. Unfortunately, those requirements cannot
possibly address all of the inequities or imbalances that might
exist in any industry including the airline industry. We do,
however, review the economic impact of all transactions to
determine if the benefits of any specific transaction outweigh
any potential injury to the U.S. economy. I should add no other
export credit agency in the world has the requirement to review
economic impact. We are the only ECA that has the requirement
to protect U.S. industries from the potential harm that other
exports might cause.
Foreign carriers have a choice when purchasing large
aircraft. Currently, they can choose between Boeing and Airbus
and soon other Nations will be competing for these sales as
well. Globally aircraft sales rely in part on export credit
support to complete those sales. If Ex-Im Bank does not provide
financing to the foreign buyers of U.S. aircraft, then Airbus,
Embraer, and Bombardier will have a competitive advantage over
Boeing since their sales campaigns are generally supported by
Government backed financing. The result will be the loss of
thousands of U.S. jobs.
Pursuant to the new 2013 Economic Impact Procedures, the
Bank, among other things, reintroduced subjecting each aircraft
application to a likelihood of substantial injury analysis. If
a likelihood of substantial injury is found, the transaction is
then subjected to a detailed economic impact analysis. The
structure of any detailed economic impact analysis for an
aircraft sale carefully balances the benefits accruing to all
U.S. manufacturers with any possible cost that may fall on U.S.
airlines.
As I mentioned export credit support is critical for
airlines globally. When eligible, U.S. airlines avail
themselves of financing from foreign ECAs, particularly from
Canada and Brazil. Some airlines also provide services to
foreign carriers that directly benefit from Ex-Im Bank
financing. One example is a Delta airlines transaction where
Ex-Im Bank is supporting an estimated 400 jobs in Atlanta, GA,
by providing financing for the export of almost $200 million of
engine overhauls services for their customer and investment
partner Gol airlines of Brazil. U.S. carriers are well
experienced and regular users of foreign export credit to
support their businesses and expansion.
Q.7. Do you believe that an exporter, representing less than 2
percent of U.S. exports, should benefit from 46 percent of Ex-
Im's total portfolio? How is this fair to the other export
sectors of the U.S. economy, and particularly to small and
medium enterprises?
A.7. The 46 percent number you cite is for all aircraft that
the Bank finances, not just one exporter. That number includes
commercial aircraft, corporate aircraft, helicopters, crop
dusters, etc. Ex-Im Bank's mandate is to support U.S. jobs
through exports. We are demand-driven and support those
applications that meet the Bank's reasonable assurance of
repayment threshold as well as our environmental and economic
impact policies, in order to level the playing field. Ex-Im
Bank only finances roughly 2 percent of the Nation's exports,
largely by financing the foreign buyers of our exports, not the
exporters themselves. Certain export sectors rely more on
export credit support than others to close the sale. They
include, the small business sector in general, satellites,
locomotives, power plant (particularly nuclear energy),
aircraft, and large infrastructure projects.
Ex-Im Bank is called upon to support the foreign purchases
of U.S. goods and services that are difficult to finance such
as aircraft, infrastructure, satellites, power plants, nuclear
power, and small business. Those are the exports that the
private sector has been reluctant to finance.
The exporter you appear to reference is the single largest
exporter in the United States, exporting tens of billions of
dollars' worth of goods each year. They also source from
thousands of small U.S. businesses providing them with billions
of dollars that support thousands of sustainable U.S. jobs.
Q.8. Does the bank, which cited foreign export credit
competition as the reason for 88 percent of its FY2012
commercial aviation transaction financings and which assumes
foreign export credit agency support will always be available
in its revised Economic Impact Procedures, even consider or
investigate the possibility of competitive, market-based
financing availability before approving transactions? If so,
how does this occur?
A.8. Yes, the Bank does investigate the possibility of
competitive, market-based financing availability before
approving transactions. As part of the analysis of a
transaction and, depending on the likelihood of nonexport
credit supported private sector financing being available based
upon staff's evaluation of the airline's underlying
creditworthiness, the type of aircraft to be exported, and the
political and economic country conditions in the airline's
country, airlines may be asked to provide information related
to other, non- Ex-Im Bank supported financing offers that it
received in connection with financing the aircraft. In
addition, airlines are always encouraged to seek alternative
private sector financing for the remainder of the aircraft. For
example, just last week the Board approved financing for Gol
Airline's (Brazil) purchase of one Boeing 737 aircraft. Gol is
taking delivery of nine Boeing 737 aircraft in 2013; however,
the Bank strongly encouraged the airline to make other
arrangements for the financing or operating lease of the
remaining eight aircraft. It is worth noting that Gol is the
only major all Boeing narrow body aircraft operator remaining
in South America. All of the other major South American
airlines operate mixed fleets.
Globally, competition between U.S. manufactured Boeing
aircraft and European manufactured Airbus aircraft is intense.
During the 6 year period of 2007 through 2012, Airbus won more
new orders and delivered more new aircraft than Boeing did in 5
of the 6 years.
Q.9. When Ex-Im finances aircraft for leasing companies, it
makes sure that the specific aircraft will not be leased into
the Home Markets to protect Boeing sales to Home Market
airlines from subsidized financing. Does the Bank take similar
steps to ensure that it does not subsidize specific aircraft
that will be flown in these Home Markets to disadvantage U.S.
airlines?
A.9. Ex-Im Bank undertakes an economic impact process that
analyzes every transaction for foreign air carriers. Ex-Im Bank
programs do not subsidize any aircraft or airline. Ex-Im Bank
always charges a risk premium that is commensurate with the
risk that Ex-Im Bank takes. In addition, the 2011 Aircraft
Sector Understanding adjusts ECA financing rates and fees every
90 days, so that the financing closely approximates private
market rates.
We provide financing on terms within the OECD arrangement
and our loans are paid back. Every financing Ex-Im Bank
authorizes is fully consistent with the rules and provisions of
the WTO.
Ex-Im Bank's mandate is to support U.S. jobs through the
export of U.S. manufactured goods and services. Accordingly,
Ex-Im Bank's Charter does not permit Ex-Im Bank to support
aircraft sales to U.S.-based airlines. As a result, Ex-Im Bank
has taken the position that if Ex-Im Bank could not directly
finance the sale of aircraft to an airline based in the United
States, the Bank should not indirectly finance the aircraft for
use by a U.S.-based airline (i.e., through an operating leasing
company).
Q.10. How does Ex-Im reach judgment on whether or not foreign
ECA competition exists? Does Ex-Im attempt to negotiate a
stand-down from European ECAs so that market-based competition
can be used by both sides for individual transactions?
A.10. Ex-Im Bank explores the existence of foreign official
financing competition and relies on lenders and exporters to
inform the Bank as to whether foreign ECA competition exists in
any given transaction. Any applicant to Ex-Im Bank must state
whether there is foreign ECA competition. Several times over
the course of the last two OECD Aircraft Sector Understanding
negotiations, U.S. negotiators explored the European
willingness to consider market-based options on individual (or
types of) cases. Each and every time, the initiative was
rejected.
Q.11. In addition, in Ex-Im's 2012 Reauthorization, Congress
mandated that the Treasury Department initiate and pursue
negotiations to substantially reduce, with the goal of
eliminating, aircraft export credit financing by all ECAs,
including specifically for wide-body aircraft.
How does Ex-Im determine that market financing is not
actually available? What is the process?
A.11. Ex-Im Bank first explores the existence of foreign
official financing competition. If such competition exists, we
seek the details on the ECA financing offer to determine if
there is a private market option and if so, determine if these
terms match the foreign ECA terms. However, if it does not, Ex-
Im Bank identifies the gap in commercial availability and
attempts to shape its support to the gap.
Q.12. Do you believe that Ex-Im should be the lender of last
resort or do you want to maintain a certain level of Ex-Im
business?
A.12. Ex-Im Bank is the lender of last resort. We finance
transactions that the commercial banks are unwilling or unable
to finance because of lack of capital, reluctance to lend,
exposure limits, etc. Our mission is to support U.S. jobs
through exports. The level of Ex-Im Bank activity is determined
by the size of gaps (e.g., competition to be met, insufficient
amount and terms from the private market) to be filled in any
given year.
In the small business sector, we target the transactions
that the banks and other insurers don't find economically
feasible to do. This does not necessarily mean taking
additional credit risk. Because the incidence of exporting is
so low in the small business sector, Ex-Im Bank could grow
substantially without altering credit standards.
Q.13. The Bank's new Economic Impact Procedures (EIPs) are now
in effect and the Board is currently reviewing an Air China
transaction for more than $100 million worth of 777s to Air
China. In the notice for this transaction it is stated that
these aircraft may result in competition with U.S. airlines.
What impact, if any, do you think the new EIPs will have on
whether this transaction will be approved? Will the bank agree
not to finance aircraft to China that compete with U.S.
airlines' business just as you prohibit such financing that
compete with Boeing's business in the U.S. (and France,
Germany, and the U.K.)?
A.13. The Air China transaction you reference was subject to
Ex-Im Bank's new EIPs, and it was determined that although the
transaction is more than $200 million and the supported
aircraft will operate two routes that will compete with U.S.
carriers, the net addition of aircraft seat capacity does not
meet the scale associated with having a potentially substantial
impact. As such, the transaction was cleared for credit
analysis without further economic impact review in the form of
a detailed economic impact analysis. Given this determination,
it is anticipated that the new EIPs will not have any impact on
whether this transaction will be approved. However, because
approval of this transaction is determined by the individual
decision of each member of the Board of Directors it is
impossible to forecast with certainty whether each Board member
will choose to support or not support this particular
transaction.
Q.14. The last Ex-Im reauthorization required the Department of
the Treasury to begin negotiations with the European Export
Credit Agencies supporting Airbus to ``substantially reduce or
eliminate'' export credit financing for wide body aircraft. The
first report on this--which Congress received in November--was
far from a report on negotiations and more of a history of
Export Credit financing. How will you push these required
negotiations moving forward and what kind of substantive
reports can we expect to see on the negotiations from the
Administration moving forward?
A.14. In Ex-Im Bank's 2012 Reauthorization, Congress mandated
that Treasury initiate and report on the negotiations described
in the question, therefore, Ex-Im Bank is not in a position to
comment on the content of future Treasury reports. Separately,
Ex-Im Bank will continue to play an important role in
supporting Treasury and Administration efforts in the
International Working Group on Export Credits, which represents
an important effort to bring China and other emerging economies
into a multilateral rules-based framework for official export
credits. Ex-Im Bank agrees with Treasury and the Administration
that getting all of the major providers of official export
credits to negotiate and ultimately abide by a common set of
international guidelines is the first step in the process of
reducing, with the ultimate goal of eliminating, trade
distorting export financing programs, and will help ensure that
official export credit support complements market financing,
rather than crowding it out.
Q.15. The report on negotiations with the Europeans included
one interesting comment. According to Treasury, ``It is
important that demand for official export credit support arise
only from a lack of market financing and not the mere presence
of competing official export credit offers.'' How does this
statement of policy mesh with the fact that 38 of 43 (88
percent) Ex-Im FY2012 aircraft financings were completed ``To
meet competition from a foreign officially sponsored export-
credit agency.''
A.15. For Ex-Im Bank to consider the authorization of an export
credit transaction, the deal must meet one or both of two
tests:
1. demand for official export credit support can arise from
absence of available private market financing; and/or
2. the existence of foreign ECA competition.
If the underlying product or pricing is not similar, the
presence of foreign ECAs is not necessarily a strong stand-
alone justification for Ex-Im Bank financing. However, a
foreign ECA that is supporting an exported good that has the
same technical specifications as the U.S. export and is
comparably priced is a clear and strong case for Ex-Im Bank
support even when there is potential market financing
available. Hence, the head-to-head competition on near
identical products, in this case aircraft, justifies Ex-Im
Bank's support based on meeting competition from a foreign
officially sponsored export credit agency alone.
Q.16. Chairman Hochberg, since July of 2010 the Ex-Im Board has
failed to deny a single financing application which it
reviewed. In fact, in your entire tenure, the Board has only
denied 16 applications (versus 52 during the term of your
immediate predecessor and 174 during the term of Chairman
Merrill). How do you explain such a record? Has the world
become absent of risk since your confirmation?
A.16. Over the last several years, private sector banks have
contracted their lending significantly, shifting stronger
credits to Ex-Im Bank. The result is both increased demand for
our services as well as stronger credit applications.
In addition, we have improved our underwriting and due
diligence, to quickly identify and resolve challenges that
transactions face. In some cases, the identified challenges
cannot be overcome, which results in the withdrawal of the
application. This helps to minimize the amount of resources
that the applicant puts into the transaction and increases
efficiency of the Bank staff. Lastly, applicants do not want to
waste time on applications that have a high likelihood of
rejection at the Board and they do not want the embarrassment
of having a transaction voted down by the Bank.
Q.17. It appears as though the Bank's Board of Directors has
not denied a transaction since the middle of 2010. In no period
since 1998 has the Bank had such a low denial rate. Is this
part of a conscious effort on your part to ensure that fewer
transactions are denied? If so, what have you done to further
that effort? Have you examined the potential consequences of
that effort, such as an increased incidence of unnecessary Bank
involvement or increased risk to U.S. taxpayers?
A.17. There is no conscious effort on Ex-Im Bank's part to deny
fewer transactions. As noted in response to your previous
question, over the last several years, we have improved our
underwriting and due diligence, resulting in identifying
challenges that any transaction may experience. As we develop
the structure and conditions that are likely to be required for
a transaction, frequently a potential borrower will withdraw
the credit request. This early identification of our
requirements has resulted in a reduced number of declinations
by the Board. It should also be noted that over the past 4
years, we have experienced financial crises, and a major
withdrawal by the private sector banks (particularly those in
Europe), conditions that make the work of the Ex-Im Bank even
more necessary.
For every transaction the Bank sets aside adequate reserves
which come out of the fees we charge to foreign purchasers of
U.S. goods and services. Our due diligence reviews look at
every transaction and risk associated with it. We are
continually reviewing and improving our risk analysis for
transactions.
Q.18. I'm not talking about the Bank's historic default rate,
I'm asking whether the Bank has actually evaluated whether its
growth under your tenure could have detrimental effects going
forward.
A.18. Yes we have. During my tenure we have modified our
reserve methodology to increase reserves at the Bank. We also
continuously monitor our transactions and we have a stronger
rated portfolio today than we did 4 years ago. Our risk
management practices and policies have been audited and
reviewed recently by Deloitte & Touche, KPMG, our internal
Audit Committee, the GAO, and our Inspector General.
Ex-Im Bank has comprehensive risk management practices,
policies, and procedures which was validated in the recent GAO
Risk Management Report. This system results in decreasing the
likelihood of default and in cases of default it maximizes
recoveries. This framework minimizes detrimental effects of a
growing portfolio going forward. The Bank has a current default
rate (March 31, 2013) of 0.307 percent and recovery efforts of
approximately 50 percent on all claims paid.
Ex-Im Bank is very proud of our efforts in these areas,
efforts that in fiscal year 2012 resulted in the payment of $37
million in gross claims on a portfolio of $106 billion while
collecting $1 billion in fee income.
Q.19. Your Bank recently admitted that ownership is not a
factor when providing assistance to companies doing business
with foreign companies/countries. In this case it was a Chinese
owned company with some manufacturing sites in the United
States. Why wouldn't you give preference to American companies,
since these foreign companies directly compete with them, and
you have said Ex-Im Bank helps ``American companies''?
A.19. Our mission is to support U.S. jobs through exports. As
long as the goods or services are of U.S. content (and they
meet our other financing requirements), we can finance the
export. Ex-Im Bank accepts applications from all applicants
that are buyers of U.S. exports. Therefore, what matters is the
demand for the U.S. export and not the ownership of the buyer.
While the U.S. export may be manufactured in the U.S. by a
foreign-owned company, the demand for this U.S.-manufactured
export supports jobs in the United States and the exported
product is being sold to an overseas buyer.
For example, the German company Siemens exported its U.S.-
manufactured equipment to a power project in Saudi Arabia. In
that deal, the award of the project by the Saudi Electricity
Company was subject to the lowest bidder in an intensely
competitive process. Japanese, German, Korean, and other
bidders had the support of their export credit agencies, some
of them offering terms outside of the OECD Arrangement.
Only because Ex-Im Bank was able to respond quickly with
competitive terms allowed in the OECD was Siemens' U.S.
manufactured equipment (ACWA Power) able to win the bid. As a
direct result of our support on this deal, Siemens expanded its
U.S. operations, making a permanent and long-term commitment at
its Charlotte, North Carolina, facility to U.S.-manufactured
goods and U.S. employment. In a similar transaction also in
Saudi Arabia, Ex-Im Bank's quick and competitive response to
Japanese, German, Korean, and other bidders, meant that GE's
equipment was selected for the project. So, we provided
financing for the foreign buyer for both GE and Siemens
equipment because we do not discriminate amongst U.S.
manufacturers and want to support U.S. jobs. It is important to
note that when U.S. companies manufacture offshore, they do not
receive Ex-Im Bank financing. We only finance U.S. exports
directly tied to U.S. jobs.
Q.20. How many employees now work at the Ex-Im Bank?
A.20. As of May 14, 2013, there are 396 employees at Ex-Im
Bank.
Q.21. What foreign companies or Governments have paid for Ex-Im
Bank travel in past year?
A.21. Please see Table 1 below.
Table 1
Q.22. Why does the Ex-Im Bank have different rules/regulations
than other Government agencies when it comes to allowing staff
to accept paid travel by companies with business pending before
the bank?
A.22. The Bank can accept sponsor-paid travel under two
different legislative authorities. This travel is consistent
with industry practice and the primary purpose of this travel
is to conduct due diligence and monitor these complex
transactions. As chairman of the Bank, I have never taken
sponsor-paid travel.
In the Bank's Charter legislation, Congress has granted to
the Bank the power to accept reimbursement for travel expenses
(12 U.S.C. 635(a)). This is consistent with the practice of
international financial institutions and other export credit
agencies in processing credit applications. All official travel
by Ex-Im Bank employees and directors are subject to approval
in accordance with U.S. Federal regulations.
The Bank is also authorized to accept sponsor-paid travel
pursuant to 31 U.S.C. 1353, an executive branch-wide authority
that permits an agency to accept a payment of ``travel,
subsistence, and related expenses'' from a non-Federal source
for an employee's official, travel away from the employee's
official station, to attend a ``meeting or similar function.''
The implementing regulation is published by the General
Services Administration at 41 CFR Chapter 304.
Q.23. Why doesn't the Ex-Im Bank make this information readily
available to the public, considering the media has already
exposed this practice?
A.23. Agencies are required to submit to the U.S. Office of
Government Ethics (OGE) semiannual reports of payments received
from non-Federal sources under 31 U.S.C. 1353. Those travel
reports are available on the OGE Web site.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR JOHANNS
FROM FRED P. HOCHBERG
Q.1. Chairman Hochberg, Section 9 of the Export-Import Bank
Reauthorization Act of 2012 requires specific public notices
prior to a meeting of the Bank's Board to consider transactions
exceeding $100 million. However, the Bank's revised Economic
Impact Procedures (required by Section 12 of the same Act) set
a $200 million threshold for review of aircraft transactions.
Given Congress' express sentiment that $100 million was an
appropriate reporting requirement, why did you feel it
appropriate to double that amount when determining the level
required to trigger a review? Can you explain the rationale for
the higher threshold?
A.1. The Bank's Charter has long required that Ex-Im Bank
report to Congress on any transactions greater than $100
million that Ex-Im Bank intends to consider. The referenced
section of the Bank's recent Reauthorization Act extended a
similar notification to the Federal Register as well.
Sec. 9 is titled ``Notice and Comment for Bank Transactions
Exceeding $100,000,000''. Section 12 is titled ``Publication of
Guidelines for Economic Impact Analyses and Documentation of
Such Analyses''. To be clear, the $100 million notification
requirement found in Section 9 is not connected to the economic
impact provisions of the Charter found in Section 12. Section 9
is simply a public notification for transactions of $100
million or more (regardless of economic impact) whereas Section
12 required the Bank to ``develop and make publicly available
methodological guidelines to be used by the Bank in conducting
economic impact analyses . . . .''
Virtually all transactions for the sale of wide-body
aircraft exceed $100 million because a single wide-body
aircraft costs at least that much. Nothing in the Bank
Reauthorization Act suggests that Congress intended the Bank to
conduct a detailed economic impact analysis on every single
transaction involving wide-body aircraft. Therefore, the Bank
follows precisely the notification requirements on transactions
exceeding $100 million, and establishes the screens for
aircraft transactions based on the likelihood of substantial
injury. It is also worth noting that the $200 million threshold
is over a 12-month period. Therefore, an airline cannot
circumvent an economic impact analysis by splitting up an
order.
The Bank's Charter requires the Bank to conduct a detailed
economic impact analysis when the adverse implications are
likely to result in substantial injury to the U.S. producers.
Congress defined substantial injury as new foreign production
that is equal to 1 percent or more of the U.S. production of
the same or similar good. In addition, Ex-Im Bank pursues
operational efficiency by, among other things, setting minimum
transaction size limits as proxy guides of when ``substantial''
injury is not likely to occur. For goods, this level is $10
million. Years of evaluation of economic impact have strongly
indicated that transactions that involve the export of capital
goods where the financed amount requested is less than or equal
to $10 million, do not have the potential to achieve
substantial adverse impact.
As referenced in the 2013 Economic Impact Procedures and
Methodological Guidelines, it generally requires two aircraft
to provide daily, long-range flights on any specific route.
Commercial jet aircraft cost no less than $35-$50 million for a
narrow body aircraft and $100-$125 million for a wide body
aircraft. Hence, the $200 million level screen assumes that it
would take at least four narrow-body or two wide-body aircraft
to create enough alternatives on at least one or two
significant routes to potentially have a noticeable impact on
the U.S. airline industry. Thus, $200 million threshold for
review of aircraft transactions is an appropriate one.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR TOOMEY
FROM FRED P. HOCHBERG
Q.1. Under what circumstances, other than bad credit, should
the Bank deny an application for financing? Can you give me a
specific example of a situation where the Bank would deny an
application?
A.1. Our Charter instructs us to review applications for
financing for a list of reasons, including creditworthiness,
adverse economic impact on the U.S. economy, consistency with
U.S. law (most notably our prohibition against financing
defense articles and prohibition against financing sanctioned
countries) and environmental concerns. Under language added to
its Charter in 1993, the Bank was directed to establish
environmental procedures that permitted the Board of Directors
to withhold financing from a project for environmental reasons
or to approve financing after considering the potential
environmental effects of a project.
In 2010, the Board of Directors initially voted to withhold
financing for U.S. exports destined for the SASAN coal-fired
power project in India, based on the project's high-carbon
intensity and its projected levels of carbon dioxide
production. Shortly after this action, the owner of the project
informed the Bank that it was prepared to commit to building
solar power projects totaling 250 MW in capacity. With this new
information stating the buyer's commitment to invest in
renewable energy, the Board of Directors reviewed for a second
time the transaction's impact on greenhouse gas production and
it subsequently voted to finance the project. I am pleased to
report that Ex-Im Bank has already supported U.S. exporters
involved in several solar projects for this buyer, totaling
approximately 150 MW. Furthermore, it has financed more than
250 MW in solar energy projects throughout India since 2010,
and we continue to address applications for renewable energy in
that market.
Over the years there have been few explicit denials on
economic impact grounds, but several major cases never made it
through the application process. Perhaps the most noteworthy
was a D-RAM project in Singapore (SMIC) where the proposed
facility would have competed with U.S. production in Idaho and
other locations. Members of the Senate Banking Committee and
others raised concern about the facility. After the Bank's
consideration of these concerns the application was withdrawn
and D-RAM was added to Ex-Im Bank's Sensitive Sectors List.
Q.2. Do you read the economic-impact provisions in the Bank's
statutory charter as requiring the Bank to conduct economic
impact analyses?
A.2. We adhere to all statutory requirements in our charter.
Indeed I read the economic impact provisions in the Bank's
statutory charter as requiring the Export-Import Bank to
consider the economic impact of all applications; but to
conduct a detailed economic impact analysis on only those
transactions where there is a likelihood of substantial adverse
economic impact. If there were not a system of reasonable
filters in place, all transactions at the Bank would require
detailed economic analysis.
In FY2012, 88 percent of all transactions were for small
business. If a detailed economic analysis were required on
every transaction, foreign buyers would simply purchase their
goods and services from a foreign source where their ECA
financing does not require such analysis. The result would be a
significant loss of U.S. jobs in States like Pennsylvania where
since 2007 Ex-Im Bank has authorized $35 billion in
transactions to 224 exporters, 140 of which are small
businesses. In Pennsylvania we finance everything from GE
locomotives to Gamesa wind turbines to SB Global Foods, Inc. in
Landsdale, PA, which has grown their gourmet pretzel business
from exporting to only one country prior to using Ex-Im up to
60 countries now.
Accordingly, all applications are subject to filters
designed to: (i) identify those cases associated with specific
legislative prohibitions (e.g., cases in which trade measures
are applicable), and (ii) determine what applications have the
potential to cause substantial injury to the U.S. industry
(when the new foreign production equals or exceeds 1 percent of
comparable U.S. production).
Q.3. How does the Bank determine whether or not foreign Export
Credit Agency (ECA) competition exists? Does the Bank attempt
to negotiate a stand-down from European ECAs so that market-
based competition can be used by both sides for individual
transactions?
A.3. Ex-Im Bank explores the existence of foreign official
financing competition and relies on lenders and exporters to
inform the Bank as to whether foreign ECA competition exists in
any given transaction. Any applicant to Ex-Im Bank must state
whether there is foreign ECA competition. Several times over
the course of the last two OECD Aircraft Sector Understanding
negotiations, U.S. negotiators explored the European
willingness to consider market-based options on individual (or
types of) cases. Each and every time, the initiative was
rejected.
Q.4. In addition, in Ex-Im's 2012 Reauthorization, Congress
mandated that the Treasury Department initiate and pursue
negotiations to substantially reduce, with the goal of
eliminating, aircraft export credit financing by all ECAs,
including specifically for wide-body aircraft.
It appears as though the Bank's Board of Directors has not
denied a transaction since the middle of 2010. In no period
since 1998 has the Bank had such a low denial rate. Is this
part of a conscious effort on your part to ensure that fewer
transactions are denied? If so, what have you done to further
that effort? Have you examined the potential consequences of
that effort, such as an increased incidence of unnecessary Bank
involvement or increased risk to U.S. taxpayers? I am not
talking about the Bank's historic default rate. I am asking
whether the Bank has actually evaluated whether its growth
under your tenure could have detrimental effects going forward.
A.4. Over the last several years, private sector banks have
contracted their lending significantly, shifting stronger
credits to Ex-Im Bank. The result is both increased demand for
our services as well as stronger credit applications.
In addition, we have improved our underwriting and due
diligence, to quickly identify and resolve challenges that
transactions face. In some cases, the identified challenges
cannot be overcome, which results in the withdrawal of the
application. This helps to minimize the amount of resources
that the applicant puts into the transaction and increases
efficiency of the Bank staff. Lastly, applicants do not want to
waste time on applications that have a high likelihood of
rejection at the Board and they do not want the embarrassment
of having a transaction voted down by the Bank.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR COBURN
FROM FRED P. HOCHBERG
Q.1. Under what circumstances, other than bad credit, should
the Bank deny an application for financing? Can you give me an
example of a situation where the Bank would deny an
application?
A.1. Our Charter instructs us to review applications for
financing for a list of reasons, including creditworthiness,
adverse economic impact on the U.S. economy, consistency with
U.S. law (most notably our prohibition against financing
defense articles and prohibition against financing sanctioned
countries) and environmental concerns. Under language added to
its Charter in 1993, the Bank was directed to establish
environmental procedures that that permitted the Board of
Directors to withhold financing from a project for
environmental reasons or to approve financing after considering
the potential environmental effects of a project.
In 2010, the Board of Directors initially voted to withhold
financing for U.S. exports destined for the SASAN coal-fired
power project in India, based on the project's high carbon
intensity and its projected levels of carbon dioxide
production. Shortly after this action, the owner of the project
informed the Bank that it was prepared to commit to building
solar power projects totaling 250 MW in capacity. With this new
information stating the buyer's commitment to invest in
renewable energy, the Board of Directors reviewed for a second
time the transaction's impact on greenhouse gas production and
it subsequently voted to finance the project. I am pleased to
report that Ex-Im Bank has already supported U.S. exporters
involved in several solar projects for this buyer, totaling
approximately 150 MW. Furthermore, it has financed more than
250 MW in solar energy projects throughout India since 2010,
and we continue to address applications for renewable energy in
that market.
Over the years there have been few explicit denials on
economic impact grounds, but several major cases never made it
through the application process. Perhaps the most noteworthy
was a D-RAM project in Singapore (SMIC) where the proposed
facility would have competed with U.S. production in Idaho and
other locations. Members of the Senate Banking Committee and
others raised concern about the facility. After the Bank's
consideration of these concerns the application was withdrawn
and D-RAM was added to Ex-Im Bank's Sensitive Sectors List.
Q.2. Do you read the economic impact provisions in the Bank's
statutory charter as requiring the Bank to conduct economic
impact analyses, or are you free to ignore those provisions?
A.2. We adhere to all statutory requirements in our charter.
Indeed I read the economic impact provisions in the Bank's
statutory charter as requiring the Export-Import Bank to
consider the economic impact of all applications; but to
conduct a detailed economic impact analysis on only those
transactions where there is a likelihood of substantial adverse
economic impact. If there were not a system of reasonable
filters in place, all transactions at the Bank would require
detailed economic analysis.
In FY2012, 88 percent of all transactions were for small
business. If a detailed economic analysis were required on
every transaction, foreign buyers would simply purchase their
goods and services from a foreign source where their ECA
financing does not require such analysis. The result would be a
significant loss of U.S. jobs. Those jobs include ones in
Muskogee, OK where we have financed Advantage Controls, LLC,
Omni Valve Company, LLC, and Array Holdings Inc.
Accordingly, all applications are subject to filters
designed to: (i) identify those cases associated with specific
legislative prohibitions (e.g., cases in which trade measures
are applicable), and (ii) determine what applications have the
potential to cause substantial injury to the U.S. industry
(when the new foreign production equals or exceeds 1 percent of
comparable U.S. production).
Q.3. How does the Bank reach a judgment on whether or not
foreign ECA competition exists? Does the Bank attempt to
negotiate a stand-down with other ECAs so that market-based
competition can occur for individual transactions?
A.3. Ex-Im Bank explores the existence of foreign official
financing competition and relies on lenders and exporters to
inform the Bank as to whether foreign ECA competition exists in
any given transaction. Any applicant to Ex-Im Bank must state
whether there is foreign ECA competition. Several times over
the course of the last two OECD Aircraft Sector Understanding
negotiations, U.S. negotiators explored the European
willingness to consider market-based options on individual (or
types of) cases. Each and every time, the initiative was
rejected.
Q.4. In addition, in Ex-Im's 2012 Reauthorization, Congress
mandated that the Treasury Department initiate and pursue
negotiations to substantially reduce, with the goal of
eliminating, aircraft export credit financing by all ECAs,
including specifically for wide-body aircraft.
Do you believe that the Bank should be a lender of last
resort or do you want to maintain a certain level of Ex-Im
business?
A.4. Ex-Im Bank is the lender of last resort. We finance
transactions that commercial banks are unwilling or unable to
finance because of lack of capital, reluctance to lend,
exposure limits, etc. Our mission is to support U.S. jobs
through exports. The level of Ex-Im Bank activity is determined
by the size of gaps (e.g., competition to be met, insufficient
amount and terms from the private market) to be filled in any
given year.
In the small business sector we target the transactions
that the banks and other insurers don't find economically
feasible to do. This does not necessarily mean taking
additional credit risk. Because the incidence of exporting is
so low in the small business sector, Ex-Im Bank could grow
substantially without altering credit standards.
Q.5. Since July of 2010 the Ex-Im Board has failed to deny a
single financing application which it reviewed. In fact, in
your entire tenure, the Board has denied only 16 applications
(versus 52 during the term of your immediate predecessor and
174 during the term of Chairman Merrill). How do you explain
this?
A.5. Over the last several years, we have improved our
underwriting and due diligence, resulting in identifying
challenges that any transaction may experience. As we develop
the structure and conditions that are likely to be required for
a transaction, frequently a potential borrower will withdraw
the credit request. This early identification of our
requirements has resulted in a reduced number of declinations
by the Board. It should also be noted that over the past 4
years, we have experienced financial crises, and a major
withdrawal by the private sector banks (particularly those in
Europe), conditions that make the work of the Ex-Im Bank even
more necessary.
Q.6. The Bank's new Economic Impact Procedures (EIPs) are now
in effect and the Board is currently reviewing an application
to finance the sale of more than $100 million in Boeing 777s
and 737s to Air China. In the notice for this transaction, the
Bank states, ``To the extent that Ex-Im Bank is reasonably
aware, the item(s) being exported may be used to produce
exports or provide services in competition with the exportation
of goods or provision of services by a United States
industry.'' What impact, if any, do you think the new EIPs will
have on whether this transaction will be approved? Will the
Bank perform a detailed economic impact analysis before
approving this transaction? If not, why?
A.6. The Air China transaction you reference was subject to Ex-
Im Bank's new EIPs, and it was determined that although the
transaction is over $200 million and the supported aircraft
will operate two routes that will compete with U.S. carriers,
the net addition of aircraft seat capacity does not meet the
scale associated with having a potentially substantial impact.
As such, the transaction was cleared for credit analysis
without further economic impact review in the form of a
detailed economic impact analysis. Given this determination, it
is anticipated that the new EIPs will not have any impact on
whether this transaction will be approved. However, because
approval of this transaction is determined by the individual
decision of each member of the Board of Directors it is
impossible to forecast with certainty whether each Board member
will choose to support or not support this particular
transaction.
Q.7. In last year's reauthorization, Congress mandated a notice
and comment period and required the Bank to provide, upon
request by a commenter, a ``nonconfidential summary of the
facts found and conclusions reached in any detailed analysis or
similar study'' for all transactions exceeding $100 million.
Yet, the Bank's new Economic Impact Procedures and
Methodologies set the threshold for detailed economic impact
analysis of aircraft transactions at $200 million. Do you think
this $200 million threshold meets the spirit of the law? Does
it not make the $100 million threshold Congress set for
disclosure of detailed economic impact analyses somewhat
meaningless?
A.7. The Bank's Charter has long required that Ex-Im Bank
report to Congress on any transactions greater than $100
million that Ex-Im Bank intends to consider. The referenced
section of the Bank recent Reauthorization Act extended a
similar notification to the Federal Register as well.
Sec. 9 is titled ``Notice and Comment for Bank Transactions
Exceeding $100,000,000''. Section 12 is titled ``Publication of
Guidelines for Economic Impact Analyses and Documentation of
Such Analyses.'' To be clear, the $100 million notification
requirement found in Section 9 requires the provision of a
nonconfidential summary in any long-term case of more than $100
million if a detailed economic impact analysis is conducted
whereas Section 12 required the Bank to ``develop and make
publicly available methodological guidelines to be used by the
Bank in conducting economic impact analyses . . . .''
Virtually all transactions for the sale of wide-body
aircraft exceed $100 million because a single wide-body
aircraft costs at least that much. Nothing in the Bank
Reauthorization Act suggests that Congress intended the Bank to
conduct a detailed economic impact analysis on every single
transaction involving wide-body aircraft. Therefore, the Bank
follows precisely the notification requirements on transactions
exceeding $100 million, and establishes the screens for
aircraft transactions based on the likelihood of substantial
injury. It is also worth noting that the $200 million threshold
is over a 12-month period. Therefore, an airline cannot
circumvent an economic impact analysis by splitting up their
order.
The Bank's Charter requires the Bank to conduct a detailed
economic impact analysis only when the adverse implications are
likely to result in substantial injury to the U.S. producers.
Congress defined substantial injury as new foreign production
that is equal to 1 percent or more of the U.S. production of
the same or similar good. In addition, Ex-Im Bank pursues
operational efficiency by, among other things, setting minimum
transaction size limits as proxy guides of when ``substantial''
injury is not likely to occur. For goods, this level is $10
million.
As referenced in the 2013 Economic Impact Procedures and
Methodological Guidelines, it generally requires two aircraft
to provide daily, long-range flights on any specific route.
Commercial jet aircraft cost no less than $35-$50 million for a
narrow body aircraft and $100-$125 million for a wide-body
aircraft. Hence, the $200 million level screen assumes that it
would take at least four narrow-body or two wide-body aircraft
to create enough alternatives on at least one or two
significant routes to potentially have a noticeable impact on
the U.S. airline industry. Thus, $200 million threshold for
review of aircraft transactions is an appropriate one.
Q.8. Last year's reauthorization legislation included a
requirement that the Treasury Department begin negotiations
with all relevant countries ``to substantially reduce, with the
ultimate goal of eliminating, aircraft export credit financing
. . . .'' In its annual report to Congress on those
negotiations, Treasury stated, ``It is important that demand
for official export credit support arise only from a lack of
market financing and not the mere presence of competing
official export credit offers.'' Yet, in FY2012, Ex-Im issued
43 loans and long-term guarantee authorizations for the export
of wide-body aircraft; in 38 of those instances (88 percent),
Ex-Im indicated the ``primary purpose identified for seeking
the Bank's support'' was ``to meet competition from a foreign
officially sponsored export-credit agency.'' How do you
reconcile this fact with the Administration's stated policy?
A.8. For Ex-Im Bank to consider the authorization of an export
credit transaction, the deal must meet one or both of two
tests: (1) demand for official export credit support can arise
from absence of available private market financing and/or (2)
the existence of foreign ECA competition.
If the underlying product or pricing is not similar, the
presence of foreign ECAs is not necessarily a strong stand-
alone justification for Ex-Im Bank financing. However, a
foreign ECA that is supporting an exported good that has the
same technical specifications as the U.S. export and is
comparably priced is a clear and strong case for Ex-Im Bank
support even when there is potential market financing
available. Hence, the head-to-head competition on near
identical products, in this case aircraft, justifies Ex-Im
Bank's support based on meeting competition from a foreign
officially sponsored export credit agency alone.
Q.9. Ex-Im's Charter states, ``It is also the policy of the
United States that the Bank in the exercise of its functions
should supplement and encourage, and not compete with, private
capital . . . .'' What steps does the Bank take to ensure that
it is supplementing, and not competing with, private capital?
A.9. Ex-Im Bank does not compete with private capital. Last
year (2012), the U.S. had total exports of $2.2 trillion, of
which Ex-Im supported approximately $35 billion. The balance
was financed in the private sector or by the exporter itself.
As part of the application for financing, an applicant is
required to explain why Ex-Im Bank is required. Ex-Im Bank also
encourages exporters to seek financing outside of Ex-Im Bank.
The financing Ex-Im Bank supports is primarily funded through
loans by private sector banks with Ex-Im Bank's support taking
the form of a guarantee or insurance. From time to time, direct
loans are granted but in these cases, the amount, tenor, and/or
complexity deters the private sector from participating.
However, they are always welcome.
Besides discussions with lenders and buyers during
individual cases, Ex-Im Bank has several broader exercises to
solicit input. The broadest is the survey of bankers and
exporters in the Annual Competitiveness Report to Congress,
where banks regularly comment on where Ex-Im is supplementing
and competing. Also, each year I convene a Banker's Roundtable
before the Ex-Im Bank Annual Conference. The high-level bankers
are not reluctant to make their views known.
Q.10. Why should airlines with access to market financing be
able to use the Bank to finance their purchases if, as the
Bank's charter states, the Bank's role is to supplement, not
compete with, market financing?
A.10. You are correct that a primary goal of the Export-Import
Bank is to supplement, not compete with, market financing.
However, there are a host of reasons why an airline who has
access to market financing would need to use Ex-Im Bank
financing from time to time. First, as we have seen in recent
years as a result of the financial crisis, in time of market
distress commercial market financing ceases to be available and
as a result Ex-Im Bank needs to step in and fill the financing
gap. In this sense, the business of the Export-Import Bank
tends to be countercyclical in nature. Second, the nature of
aircraft acquisition is for airlines to purchase a large order
of multiple aircraft at a time. Given the volume of aircraft
finance needed to finance an order, it is oftentimes the case
that the commercial markets will only be able to finance a
portion of the order and as a result Ex-Im Bank financing is
needed to finance the aircraft in the order that the market is
unwilling to do. Third, just as is prudent business practice in
any industry, airlines seek a diversified mix of financing
sources to finance their acquisitions, in this case their fleet
of aircraft needed to perform business operations. Export
credit in the form of Ex-Im Bank supported financing is one
element in this financing mix necessary to achieve portfolio
diversification and not leave an airline overly dependent on
one form of financing.
Q.11. Can competition with private capital by foreign ECAs ever
justify Ex-Im financing of a given transaction, even if the
Bank's own financing could also compete with private capital?
A.11. Yes. In such a case, Ex-Im Bank would use its best
judgment to determine whether the loss of a transaction due to
competition from private capital covered by a foreign ECA is of
significant size and scope for Ex-Im Bank to use its own funds
even though private capital in the U.S. market may be
displaced. The Bank would weigh the costs and benefits of an
exporter losing a transaction (e.g., potential loss of U.S.
jobs) versus the loss of a private capital supported
transaction (e.g., potential loss of profits).
Q.12. Why did Ex-Im not issue financing for three transactions
it approved from 2009 to 2012 for the export of solar panels by
SolarWorld?
A.12. Three cases for SolarWorld that were approved from 2009-
2012 were authorized but later canceled without funding by Ex-
Im Bank. All of these cases involved limited recourse project
finance, a type of finance requiring substantial documentation.
The time to close and fund a project finance transaction is
more than twice that of a typical corporate or bank finance
transaction. In the time between Board approval and financial
close there can be changes in market conditions, the borrower's
circumstances, and new funding opportunities may arise that
affect the benefits and viability of Ex-Im Bank finance. Even
though Ex-Im Bank endeavors never to impose burdensome,
unnecessary, or unexpected conditions, borrowers sometimes have
more difficulty meeting closing conditions than they expect. As
a result, project finance transactions can be withdrawn and
canceled, as was the case with the three transactions in
question.
In 2009, the Board approved five small projects for Gochang
Solar in South Korea for approximately $61 million. However,
after Board authorization and following a reversal in the Won/
Dollar exchange rate that increased the cost of Ex-Im Bank
financing, the South Korean borrower informed us that, as a
condition to the financing, it wished to change important terms
of the Board approval. It furthermore refused to comply with
customary and important conditions for closing and funding.
When agreement became impossible, staff canceled this
commitment. As this was a post-completion financing, the
borrower did purchase SolarWorld equipment without Ex-Im Bank
support.
In 2011, the Board authorized a transaction in India for
the Tatith Solar Project in the amount of approximately $19
million. The commitment was contingent upon the borrower's
successful execution of construction, supply, engineering, and
other documents. The borrower was unable to comply with the
stated requirements and Ex-Im Bank staff was forced to cancel
the commitment. To the best of Ex-Im Bank's knowledge, the
Tatith borrowers were unable to obtain other financing and did
not purchase SolarWorld equipment.
In 2012, Ex-Im Bank approved the Stardale Project in Canada
for a loan guarantee for $81 million. The borrower, however,
refused to agree to customary financing terms. The borrower
informed Ex-Im Bank that it wished to withdraw the financing
request and asked Ex-Im Bank to withdraw the commitment which
Ex-Im Bank staff did. A potential motivating factor in the
borrower's decision making was that Ex-Im Bank's co-lender was
willing to lend more money to the transaction, enough to cover
Ex-Im Bank's share, and without the same conditions. At the
time of the Ex-Im Bank Board approval, this additional
financing was not on offer. Ex-Im Bank staff understands that
the Borrower did use this finance to fund SolarWorld related
costs and complete the project.
Q.13. What foreign companies or Governments have paid for Ex-Im
travel in the past year?
A.13. Please see Table 1 above.
Q.14. Why does the Bank have different rules than other
Government agencies when it comes to allowing staff to accept
paid travel by companies with business pending before the Bank?
A.14. The Bank can accept sponsor-paid travel under two
different legislative authorities.
In the Bank's Charter legislation, Congress has granted to
the Bank the power to accept reimbursement for travel expenses
(12 U.S.C. 635(a)). This is consistent with the practice of
international financial institutions and other export credit
agencies in processing credit applications and prevents the
Bank's due diligence activities from burdening U.S. taxpayers.
All official travel by Ex-Im Bank employees and directors are
subject to approval in accordance with U.S. Federal
regulations.
Additionally, the Bank is authorized to accept sponsor paid
travel pursuant to 31 U.S.C. 1353, an executive branch-wide
authority that permits an agency to accept a payment of
``travel, subsistence, and related expenses'' from a non-
Federal source for an employee's official, travel away from the
employee's official station, to attend a ``meeting or similar
function.'' The implementing regulation is published by the
General Services Administration at 41 CFR Chapter 304. Agencies
are required to submit to the U.S. Office of Government Ethics
(OGE) semiannual reports of payments received from non-Federal
sources under 31 U.S.C. 1353. Those travel reports are
available on the OGE Web site.
Q.15. Please provide a full list of Ex-Im employees, including
individual salaries and most recent bonuses.
A.15. [Ed.--The response is confidential and has been provided
to the Member asking the question.]
Additional Material Supplied for the Record