Consultation outcome

Foreign Content Policy: annexes

Published 3 April 2019

This was published under the 2016 to 2019 May Conservative government

1. Annex A: Recent developments

1. Changes in Global Trade and ECAs responses to this trend

1.1. Since 2007, global supply chains have become increasingly complex. Major transactions increasingly include multiple supply/buyer contracts with different supply chains that each address various phases of a project. Overseas buyers are seeking to source elements of a project from various countries to utilise the specialisation of domestic economies when considering the cost and quality of the goods and/or services being procured.

1.2. UK Export Finance (UKEF) is increasingly being asked to support projects and transactions that include a considerable amount of UK exports but may also involve multiple foreign contracts or non-standard contract structures. Examples of such scenarios include:

• Two contracts supporting one project, but which are not contractually linked. The first contract, consisting of design, project management, engineering etc, has a large amount of UK Content but a lower contract value. The second contract has little or no UK Content but a larger contract value. UKEF has been asked to consider supporting the financing for the second contract, which may experience greater difficulties in obtaining commercial financing due to the size or complexity of the overall project. This support is requested on the basis that unless finance for the second contract can be secured, the first contract will not go ahead and therefore put the significant UK content within the first contract at risk.

• Two or more closely connected contracts require financing to support an overall project. In this scenario, only one contract contains the current UK Content required for UKEF support, but none of the contracts will go ahead without the financing of the overall project. Support is requested on the basis that unless the overall project is financed, the contract with the UK content will not go ahead and therefore put the UK content at risk.

• Support for a tranche of finance for a contract or project where the UK Content calculated as a proportion of the Total Contract Value is less than 20%. Support would be provided based on multiplying the UK Content by a factor of up to five, resulting in UK Content as a proportion of the UKEF financed tranche being at least 20%.

• Aggregating the level of supply chain spend in the UK by an overseas company and using this as a baseline to size support for specific contracts to which the UK supply chain spend may not have contributed. Alternatively, the UK supply chain spend may have contributed to the specific contract, but by less than 20% of the value of the contract.

• Establishing a line of credit within which there are multiple contracts with multiple buyers, aggregating UK Content across the line and calculating it as a proportion of the line

1.3. The global Export Credit Agency (ECA) environment is becoming increasingly competitive. Changes in global supply chains have led to other ECAs adopting more flexible approaches to Foreign Content to be proactive in ensuring their exporters are at the forefront of international trade^{[footnote 1]}. For instance, since 2007:

• Some national ECAs, such as France and Sweden, have lowered their minimum national content requirement

• Some ECAs, such as Sweden, Norway, Finland, Italy, Japan and Germany have adopted a two-level approach when evaluating Foreign Content. This involves incorporating both minimum national content levels, alongside mechanisms to consider proposals where national content levels may be far lower, on a national interest basis. The national interest criteria of these ECAs, while differing slightly, centralise upon the following considerations:

  – How the proposal will impact the ECA’s domestic economy’s employment

  – Whether the company has a significant presence in, or originates from, the ECA’s domestic economy

  – What the research and development implications are for the ECA’s economy

  – There is a requirement imposed by the buyer on sourcing, or it is impossible to source certain content from the ECA’s economy

• Denmark meanwhile takes a ‘Danish Economic Interest’ approach, which means that support is given to a transaction if a ratio of ‘Danish Economic Interest’ to credit risk is satisfied. If the transaction does not satisfy this ratio, then a transaction may still be supported if the company itself is a contributor to the ‘Danish Economic Interest’. This is measured primarily by aggregating the following:

  – The company’s wages paid in Denmark

  – Research and investment in Denmark

  – The amount of corporate tax payed

  – The value of goods/services sourced from Denmark

• Countries, which are not participants to the Arrangement are expanding their ECA presence with different criteria for support, including taking a purely national interest approach in strategic sectors or markets. This allows them to be very flexible in their considerations of when to provide support and can include support for contracts comprised of wholly Foreign Content.

• In this context, sponsors of large projects are looking to limit the number of ECAs involved in transactions for the ease of negotiation and select only those that have flexible Foreign Content policies. As a result, UK participation (i.e. the award of roles and contracts) in major transactions may increasingly depend on the willingness of UKEF as the UK’s ECA, to consider the context of the project or transaction we are being asked to support and consider UK Content beyond the specific contract we are supporting.

2. Annex B: Definitions

Foreign Content

1. The cost to the applicant of purchasing from suppliers or subcontractors any non-UK goods or non-UK services (inclusive of Local Content) which are to be supplied under that contract or those contracts. (See Annex D for rules relating to second hand goods, equipment leases)

2. With an overseas applicant this is the Total Contract Value minus UK content.

UK Content

In the 2007 Consultation response UK content was defined as meaning the price of goods and services supplied under that contract or those contracts which are produced or performed by the UK exporter or by sub-suppliers or sub-contractors carrying on business in the UK. However, this definition did not reflect UKEF’s practice regarding the calculation of UK content and no change to that practice has been proposed in this consultation. The definition currently being used is:

1. For a UK applicant Total Contract Value minus the cost to the applicant of purchasing Non-UK goods or Non-UK services which are to be supplied under that contract or those contracts.

2. With an overseas applicant this will be the cost to the buyer of purchasing goods and services to be supplied under that contract or contracts by UK exporters, sub-suppliers and sub-contractors carrying on business in the UK.

Local Content

The cost to the applicant of purchasing goods and services which are to be supplied under the UKEF-supported supply contract(s) but which are provided by sub-suppliers or sub-contractors in the buyer’s country. These costs may include import duties if the relevant contract stipulates that they will be payable by the applicant on behalf of the buyer.

Total Contract Value

The contract value including all UK and Foreign Content. Where UKEF’s premium is to be financed from the loan, UKEF’s position is that this will not be considered part of the Total Contract Value.

Non-UK goods

Non-UK goods are goods which are manufactured outside the UK and are either (1) shipped directly to the overseas buyer, or (2) shipped to the supplier in the UK but do not undergo further industrial processing in the UK. Where such goods do undergo further industrial processing in the UK or are used as components in equipment assembled in the UK, they may be regarded as constituting UK goods. The determining factor is whether the finished product would be eligible to receive a UK Country of Origin Certificate from the UK exporter’s local Chamber of Commerce. It is for the applicant to confirm the source of contract amounts (be it UK, Foreign or Local), albeit UKEF retains the right to carry out audit checks to verify.

Non-UK Services

Non-UK services are services which are rendered by persons ordinarily resident outside the UK. Software and related services including intellectual property originating in the UK and exported electronically, where no Certificate of Origin is available, can be treated as UK content.

Export Contract Value

This is the total amount to be paid by or on behalf of the purchaser for goods and/or services exported. This therefore excludes Local Content. This is an internationally defined term in the Organisation for Economic Co-operation and Development (OECD) Arrangement.

OECD Arrangement

The Arrangement provides a framework for the orderly use of officially supported export credits and applies to all official support provided by or on behalf of a government for export of goods and/or services, including financial leases which have a repayment term of two years or more.

3. Annex C: Current Foreign Content policy

1. The 2007 Public Consultation

1.1. The objective of the 2007 Consultation was to outline a simplified evidence-based Foreign Content policy that reflected both the aims of the Foreign Content policy and then recent developments in global trade.

• The export contracts supported by UKEF may often include the supply of certain non-UK goods or non-UK services as a result of a need to source some of the goods and services in the buyer’s country or from other countries outside the UK, in order to achieve the right mix of price and technology necessary to be awarded that contract. This practice has existed for many years.

• UKEF’s willingness to support Foreign Content enables it to provide cover for the whole contract under a single insurance policy, guarantee or loan.

• In particular, multi-sourcing had meant that the UK’s capability to export manufactured capital goods had declined while capability in service provision and high technology items had grown. This occurred while emerging economies built up their own industrial base and there was a growing requirement for some goods within a UK export contract to be sourced from around the world.

2. Government Response to this Consultation

2.1. The 2007 Consultation offered 3 options:

• UKEF to retain its existing policy

• UKEF to adopt a policy based on broad “national interest”^{[footnote 2]} principles

• UKEF to adopt a policy based on guideline maximum levels of UK and Foreign Content, around which there would be flexibility to support more or less Foreign Content. It was proposed that the guideline would be 50% maximum Foreign Content for Credit Contracts, with the Cash Contract policy remaining unchanged. It was also proposed to remove the distinction between EU / Japanese and non-EU / non-Japanese content

2.2. A number of responses to the Consultation argued the UKEF proposal of 50% max Foreign Content did not go far enough. The suggested figures for the new guideline ranged from 65% - 90% max Foreign Content. Some respondents argued for UKEF to take a “national interest” approach. Submissions from trade unions and NGOs were concerned that any reduction in the required UK Content may lead to work that could be done in the UK being moved abroad, and that UKEF should satisfy itself that this would not be an unintended consequence of any policy change.

3. The Government’s decision, and policy since the 2007 Response to the Consultation, was to remove the distinction between credit contracts above or below £10m and bring credit contracts in line with the policy for cash contracts

This policy can be expressed as:

3.1. “in all credit contracts, the maximum level of support for all Foreign Content will be 80% of the contract value where Export Credits Guarantee Department (ECGD) risk capacity is available, thus requiring a minimum 20% UK content”.

3.2. In addition:

• The differentiation between EU / Japanese and non-EU / non-Japanese Content was removed

• Software and related services originating in the UK and exported electronically would be treated as UK Content

• UK Content status would not be conferred on goods manufactured in foreign countries by subsidiaries of a UK registered applicant

• The maximum level of support for Local Content in all contracts would be determined in accordance with the OECD Arrangement

• The revised policy would continue to not apply to Airbus transactions, which were, and remain, subject to separate arrangements between the relevant EU Governments^{[footnote 3]}

• The rules would apply to limited recourse and structured finance transactions provided that UKEF’s requirement for risk sharing with other ECAs or other parties was not undermined

• UKEF’s ability to support any Foreign Content would be informed by its risk appetite. There was no change to UKEFs risk policy and pricing policy as a result of these decisions

4. Overseas applicants

4.1. In 2015, the Export and Investment Guarantees Act (EIGA) was amended to enable UKEF to provide support that is “conducive to supporting or developing (whether directly or indirectly) supplies” from a UK entity to an overseas entity. This made a clearer line to consider support for a project where the contracting chains might be complex, for example, support for contracts with an overseas buyer won by non-UK domiciled applicants, where their contract contained goods and/or services originally sourced from the UK.

4.2. UKEF will on a case by case basis accept an application from an overseas applicant, such as when the contracting structure demands it or when the applicant’s home ECA cannot provide support and there is significant UK interest in UKEF doing so.

4.3. In determining the level of UK content for an overseas applicant, UKEF current practice is to aggregate the value of the UK sub-contracts within the overseas contract to determine whether these contracts constitute at least 20% of the contract value.

4.4. This contrasts with the position for a UK main applicant, who must declare the level of UK content on the basis of total contract value minus the cost to the UK exporter of purchasing from overseas suppliers or sub-contractors any non-UK goods or non-UK services (inclusive of Local Costs) which are to be supplied under that contract.

4.5. The rationale behind the approach to overseas applicants is to encourage the procurement of goods and services from UK companies in line with the EIGA and therefore to support or develop (whether directly or indirectly) supplies from a UK entity to the overseas entity.

• In line with the approach on UK main applicants, UKEF requires declarations from the overseas applicant in relation to the level of UK content within their contract (taking into consideration the definition outlined in para 4.3.).

• Introducing additional scrutiny of sub-contract tiers beyond that outlined in 4.3 and in line with that outlined in 4.4. may have the unintended consequence of reducing the attractiveness of the UK supply chain to the overseas main applicant as a result of additional administrative measures. For example, in large and complex projects, an overseas applicant may have dozens of UK sub-contracts. It would be burdensome on the applicant to provide declarations in relation to all those UK sub-contracts.

• In addition, overseas applicants may regard this additional requirement as a policy which adversely impacts either the amount or availability of UKEF support. This could mean that from the outset applicants source goods/services from elsewhere to gain an assured amount of financing support from another ECA without this requirement. This may increase the barriers to entry SMEs face when wishing to enter global supply chains.

5. Foreign content in second hand goods and equipment leases

5.1. In order to avoid giving its support for sales of foreign produced second-hand equipment by intermediaries (including brass plate companies established in the UK merely to access the availability of UKEF support), UKEF does not normally provide support for exports of second-hand goods which were manufactured outside the UK unless, as at the time at which UKEF is about to commit to provide any support in relation to any such goods, those goods (i) have been imported into the UK (and cleared inwards through UK Customs) at least one year previously and (ii) for the whole of the immediately preceding period of 12 months, they have been owned by a person, or a series of persons, carrying on business in the UK. Where these conditions are satisfied, the cost to the UK exporter of purchasing the goods will not be deemed to be Foreign Content for the purposes of UKEF’s Foreign Content Policy.

5.2. In the case of sales of second-hand aircraft, the above practice is consistent with the OECD Aircraft Sector Understanding, which contemplates that Export Credit Agencies may provide support for sales of second-hand aircraft which are more than one year old. Such exports are deemed to be UK origin in line with paragraph 5.1 above.

5.3. The principle set out in paragraph 5.1 above will also apply where UKEF is asked to support the supply by a UK exporter of any goods manufactured outside the UK which have not been used by the UK exporter but simply held as stock for at least one year after being imported into the UK

5.4. The policies in paragraphs 5.1 and 5.3 above do not affect UKEF’s policy that, if goods or materials which are imported into the UK and subsequently lose their identity in a manufacturing process carried out in the UK and if the product of that process would be eligible for a certificate of UK origin from a UK Chamber of Commerce, the cost of those goods or materials will not be regarded as Foreign Content.

6. Foreign Content in equipment leases

6.1. Where UKEF is requested to provide support for contracts under which a exporter leases equipment to a person outside the UK

6.2. if the exporter leases the equipment from an owner or superior lessor outside the UK under a head lease, the payments which the exporter makes under that head lease during the term of the lease granted by the exporter will represent Foreign Content of that lease

6.3. if the exporter owns the equipment, but it has been manufactured outside the UK, the principle in paragraph 5.1 above will be applied in order to calculate the Foreign Content of the lease.

1. US Export-Import Bank of the United States, Report to the U.S. Congress on Global Export Credit Competition June 2018 (EXIM Export-Import Bank of the United States: Washington DC) ↩

2. “National Interest” was defined as “a broad range of qualifying criteria. Decisions are taken on a case-by-case basis on the principle that, if there is an advantage to the domestic economy in supporting a particular contract, the Foreign Content in that contract should be included in that support.” ↩

3. The “workshare” in each aircraft/engine type is determined in part by the relative levels of content and launch aid, etc. ↩