Correspondence

Letter from UK Export Finance to Secretary of State for Business & Trade on NAREW air defence programme, 2024

Published 31 October 2024

From:

Tim Reid
Chief Executive
UK Export Finance
1 Horse Guards Road
London
SW1A 2HQ

To:

Rt Hon Kemi Badenoch MP
Secretary of State for Business and Trade
Department for Business and Trade
Old Admiralty Building
London
SW1A 2BL

23 May 2024

Dear Secretary of State,

UK Export Finance (UKEF) support for Poland - ‘NAREW’

You have considered my advice relating to potential UKEF support for a series of large prospective defence-related orders by Poland that involve UK suppliers. These could require UKEF to take up to £15 billion of risk in this market. I refer specifically here to the first such contract, the NAREW air defence programme, in which MBDA UK is one of the key suppliers. This letter sets out my position as UKEF’s Accounting Officer on the issue.

UKEF operates under an Exposure Management Framework (EMF) agreed with HM Treasury that is designed to allow UKEF to provide support where it is needed for UK exporters while managing potential risks to the Exchequer arising from both individual transactions, overall exposure in a particular market, and across the UKEF portfolio. This forms the basis of UKEF’s normal underwriting criteria and going outside of the EMF is not permitted under the terms of HM Treasury’s standing consent for UKEF (the “Consent”).

I previously advised you that increasing UKEF’s country risk appetite for Poland to £15 billion would take it significantly beyond the limits set out in the EMF. In the case of the financing arrangements for the supply of the NAREW programme, this will involve UKEF incurring total contingent liability that could approach approximately £9 billion.

I am satisfied that the overall risk in relation to Poland is low, and that UKEF would receive adequate premium to compensate it for its estimation of that risk on each transaction it supports. However, the quantum of exposure that UKEF could be required to take relative to the overall size of its portfolio is high and would expose UKEF to the risk of a breach of the financial objectives set by HM Treasury as part of UKEF’s Consent (under the Export and Investment Guarantees Act 1991 - EIGA) should problems arise in relation to repayment of any of the financing agreements.

Managing Public Money requires me to ensure that any transactions that UKEF supports represent value for money to taxpayers, meet tests of regularity and propriety, and are feasible. The key test in this case is regularity in complying with the terms of the Consent and legislation that UKEF operates under, and value for money in terms of the potential portfolio impacts in the unlikely event that such a large transaction was to become distressed.

However, I recognise that you may wish to take a broader view. If that is your decision, I will proceed accordingly but require your written instruction to do so due to the issue noted above concerning regularity and value for money.

I note that under the Export and Investment Guarantees Act, the consent of the Treasury is required for your instruction to be lawful. The Treasury has agreed with your view that it is in the national interest to support the NAREW programme and will consent should you instruct me to proceed. I will ensure the necessary steps are taken to carry forward your instruction without delay.

I am grateful for the attention you have paid to this issue. I am satisfied that your decision will be taken on the basis of the available information. In line with normal practice for directions, I am required to alert the Comptroller and Auditor General and the Treasury Officer of Accounts.

It is normal practice for you to inform Parliament where you issue an instruction to UKEF. However, in this instance, we consider that for reasons of commercial sensitivity, it is in the public interest for the direction to be kept confidential until the point at which the financing has become effective. Our exchange of letters will not be published until that time. However Managing Public Money also stipulates that in cases where the direction is kept confidential, you should inform the Chairs of the Public Accounts Committee and the Business and Trade Select Committee.

Yours sincerely,

Tim Reid

Chief Executive, UK Export Finance