Consultation outcome

Government response to Consultation on UKEF's Foreign Content Policy: annexes

Published 3 April 2019

1. Annex A

List of respondents:

• Confederation of British Industry
• Federation of Small Businesses
• Lloyds Banking Group
• Barclays
• MBDA Systems
• British Insurance Brokers’ Association
• UK Finance
• Caterpillar Inc
• Wilben Trade
• Premier Oil
• Maritime London
• Commerzbank
• Siemens
• PricewaterhouseCoopers LLP
• Colas Limited
• GKB Ventures Ltd
• British Exporters Association
• Mace Group
• GE Capital Limited
• Wood Plc
• ASGC Group
• Coltraco Ultrasonics
• Fire Industry Association
• PJ Valves Holdings Ltd
• 2 anonymous responses
• 2 members of the public

2. Annex B

2.1 Proposals outlined in the April 2019 consultation paper

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

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

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

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

2.2 Principle Two: If Principle One is not met

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

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

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

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

Example A

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

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

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

Example B

There are 2 contracts that are supporting an overall project, but which are not contractually linked.

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

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

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

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

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

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

Example C

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

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

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

Example D

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

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

2.4 Secretary of State’s Discretion

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

2.5 Additional question

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

2.6 Future changes

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

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