    Export-Import Bank: Improvements Needed in Assessment of Economic
    Impact (12-SEP-07, GAO-07-1071).

    Congress established the Export-Import Bank of the United States
    (Ex-Im) to encourage U.S. exports. Congress has directed Ex-Im to
    consider the economic impact of its work and not to fund
    activities that will adversely affect U.S. industry. In this
    context, GAO reviewed (1) Ex-Im's policies and procedures for
    determining economic impact, (2) the extent to which Ex-Im
    appropriately identifies and analyzes projects that could cause
    adverse economic impact, and (3) the extent to which Ex-Im's
    process is transparent. To conduct this work, GAO reviewed
    Ex-Im's procedures, data on projects applicable for the economic
    impact process, and detailed economic impact analyses. GAO also
    interviewed Ex-Im and reviewing agency officials and industry
    representatives.
    -------------------------Indexing Terms-------------------------
    REPORTNUM:   GAO-07-1071
        ACCNO:   A76209
      TITLE:     Export-Import Bank: Improvements Needed in Assessment of
    Economic Impact
         DATE:   09/12/2007
      SUBJECT:   Cost analysis
    	     Cost effectiveness analysis
    	     Economic analysis
    	     Economic policies
    	     Exporting
    	     Importing
    	     Internal controls
    	     International cooperation
    	     International economic relations
    	     International trade
    	     Program evaluation
    	     Reporting requirements
    	     Policies and procedures
    	     Transparency

    ******************************************************************
    ** This file contains an ASCII representation of the text of a  **
    ** GAO Product.                                                 **
    **                                                              **
    ** No attempt has been made to display graphic images, although **
    ** figure captions are reproduced.  Tables are included, but    **
    ** may not resemble those in the printed version.               **
    **                                                              **
    ** Please see the PDF (Portable Document Format) file, when     **
    ** available, for a complete electronic file of the printed     **
    ** document's contents.                                         **
    **                                                              **
    ******************************************************************
    GAO-07-1071

         * [1]Results in Brief
         * [2]Background
         * [3]Economic Impact Analysis Screening Process Identifies Projec

              * [4]Ex-Im Uses a Screening Process to Identify Projects for Deta

                   * [5]Ex-Im's Charter Specifies Some Analytic Screens, Ex-Im
                     Intro
                   * [6]Few Applications Receive a Detailed Analysis
                   * [7]Projects Financed for $10 Million or Less Are Reviewed
                     Posta

              * [8]Detailed Economic Impact Analysis Assesses Oversupply, Compe
              * [9]Ex-Im Approved Most Projects Applicable for Economic Impact

         * [10]Challenges and Limitations Exist in Identifying and Analyzin

              * [11]Screens Used to Identify Applications for Detailed Analysis

                   * [12]Volume of Applications Creates Challenges in Screening
                     for E
                   * [13]Exemption of "Undersupplied" Sectors from Analysis Has
                     Been
                   * [14]Effectiveness of the $10 Million Threshold Has Not Been
                     Dete

              * [15]Detailed Analysis Has Challenges and Certain Limitations

                   * [16]Detailed Analysis Has Inherent Challenges
                   * [17]Calculation and Presentation of Some Potential Costs
                     Could B

                        * [18]Calculation of Displaced U.S. Production
                        * [19]Potential Costs Related to Lower Prices

                   * [20]Characterization of Financing Effect on Trade Balance
                     Can Be

              * [21]Controls on Ex-Im's Economic Impact Process Could Be Strengt

                   * [22]Limited Training or Systematic Guidance Was Provided on
                     How
                   * [23]Approvals and Verification Were Not Systematically
                     Obtained
                   * [24]Ex-Im Does Not Maintain Some Important Documentation
                   * [25]U.S. Government Agencies Have Provided an Important
                     Review F

         * [26]Transparency of Economic Impact Procedures Has Limitations

              * [27]Publicly Available Procedures Contain Areas of Ambiguity

                   * [28]Economic Impact Process Is Not Easily Understood
                   * [29]Ex-Im's Procedures Do Not Provide a Clear Basis for the
                     Asse
                   * [30]Procedures Do Not Have Criteria for when to Use
                     Proportional

              * [31]Public Comments Are Not Fully Included in Board Memorandums
              * [32]Incorporating New Practices Would Increase Process's Predict

         * [33]Conclusions
         * [34]Recommendations
         * [35]Agency Comments and Our Evaluation
         * [36]Appendix I: Objectives, Scope, and Methodology
         * [37]Appendix II: List of Detailed Economic Impact Analyses That
         * [38]Appendix III: Comments from the Export-Import Bank of the Un
         * [39]Appendix IV: GAO Contact and Staff Acknowledgments

              * [40]Contact
              * [41]Staff Acknowledgments

                   * [42]Order by Mail or Phone

    Report to Congressional Requesters

    United States Government Accountability Office

    GAO

    September 2007

    EXPORT-IMPORT BANK

    Improvements Needed in Assessment of Economic Impact

    GAO-07-1071

    Contents

    Letter 1

    Results in Brief 2
    Background 5
    Economic Impact Analysis Screening Process Identifies Projects for
    Detailed Analysis 8
    Challenges and Limitations Exist in Identifying and Analyzing Projects for
    Economic Impact 18
    Transparency of Economic Impact Procedures Has Limitations 30
    Conclusions 35
    Recommendations 36
    Agency Comments and Our Evaluation 37
    Appendix I Objectives, Scope, and Methodology 39
    Appendix II List of Detailed Economic Impact Analyses That Ex-Im Began
    between Fiscal Years 2002 and 2006 42
    Appendix III Comments from the Export-Import Bank of the United States 45
    Appendix IV GAO Contact and Staff Acknowledgments 47

    Tables

    Table 1: Detailed Economic Impact Analyses and Board of Directors'
    Financing Decisions 42
    Table 2: Detailed Economic Impact Analyses, with No Final Board of
    Directors' Decision Because of Transaction Withdrawal 43
    Table 3: Detailed Economic Impact Analysis Conducted Postauthorization at
    the Request of the Credit Committee 43
    Table 4: Detailed Economic Impact Analysis Conducted Postauthorization
    Pursuant to the Consolidated Appropriations Act of 2004 43
    Table 5: Unfinished Detailed Economic Impact Analyses 44

    Figures

    Figure 1: A Conceptual Illustration of How Ex-Im Provides Financing to
    Foreign Companies but Risks Creating a Negative Impact on U.S. Producers 7
    Figure 2: Ex-Im's Process for Screening Applications, Assigning Economic
    Impact Codes, and Selecting Projects for Detailed Economic Impact Analysis
    12
    Figure 3: Economic Impact Categorization of Ex-Im Applications That Were
    Acted Upon, by Number and Value (Fiscal Years 2003-2005) 14
    Figure 4: Comparison of Number and Dollar Value by each Economic Impact
    Code for the 525 Approved Applicable Projects (Fiscal Years 2003-2005) 17

    Abbreviations

    Ex-Im Export-Import Bank of the United States
    ITA International Trade Administration
    ITC U.S. International Trade Commission
    OECD Organisation for Economic Cooperation and Development
    OMB Office of Management and Budget
    USTR Office of the U.S. Trade Representative

    This is a work of the U.S. government and is not subject to copyright
    protection in the United States. The published product may be reproduced
    and distributed in its entirety without further permission from GAO.
    However, because this work may contain copyrighted images or other
    material, permission from the copyright holder may be necessary if you
    wish to reproduce this material separately.

    United States Government Accountability Office
    Washington, DC 20548

    September 12, 2007

    The Honorable Charles E. Grassley
    Ranking Member
    Committee on Finance
    United States Senate

    The Honorable Michael Crapo
    United States Senate

    Congress established the Export-Import Bank of the United States (Ex-Im)
    in 1934 to support U.S. exports and create jobs for Americans. Over time,
    Congress has recognized that Ex-Im's support of exports by U.S. firms in
    certain sectors could potentially adversely impact U.S. firms in other
    sectors.^1 Congress requires Ex-Im to assess whether its financial support
    for a project would likely cause substantial injury to U.S. industry or
    would result in the production of a good that is subject to a relevant
    trade measure. A finding that would lead to either of these outcomes could
    result in a denial of Ex-Im support. In reauthorizing Ex-Im in 2002,
    Congress reiterated its concerns about potential adverse economic impacts
    on U.S. producers by increasing the bank's economic impact assessment
    requirements. Although Ex-Im created a multistep process to determine what
    impact the projects it finances could have on the U.S. economy, Congress
    continued to be concerned that these procedures did not ensure that
    projects were adequately identified, analyzed, or disclosed. In December
    2006,^2 Congress again revised the economic impact assessment to require
    more information disclosure. Congress remains interested in how Ex-Im
    assesses the impact that its services have on the competitiveness of U.S.
    producers.

    In this context, we reviewed (1) Ex-Im's overall policies and procedures
    for determining economic impact; (2) the extent to which Ex-Im's
    procedures provide for the identification and appropriate analysis of
    projects that could potentially cause adverse economic impact; and (3) the
    extent to which its policies, procedures, and decisions are transparent to
    interested and affected parties.

    ^1As an illustrative example, the concern has been that if Ex-Im provided
    favorable financing to a steel plant in Asia to expand capacity, using
    exported U.S. goods in building the plant, the project could potentially
    have a negative impact on U.S. steel producers through increased foreign
    competition.

    ^2Export-Import Bank Reauthorization Act of 2006 (Pub. L. No. 109-438).

    To assess Ex-Im's policies and procedures for identifying applications for
    a detailed economic impact analysis, we obtained and analyzed data on
    applications that were applicable for economic impact analysis from fiscal
    years 2003 through 2005, and discussed these data and Ex-Im's screening
    process with Ex-Im officials. To describe Ex-Im's process for conducting
    detailed economic analyses, we reviewed the 17 economic impact analyses
    that Ex-Im completed between fiscal years 2002 and 2006 in light of their
    procedures as they were written in response to the 2002 reauthorization.
    We chose 5 detailed analyses to review in greater depth, reflecting a
    range of countries, industries, and economic issues. We discussed those
    analyses with officials from Ex-Im and other U.S. government agencies. We
    also reviewed Ex-Im's updated procedures, created in April 2007 in
    response to the 2006 reauthorization. To assess the transparency of
    Ex-Im's economic impact assessment process, we reviewed relevant
    documentation and interviewed officials from agencies that provide
    comments on Ex-Im's draft economic impact analyses and representatives
    from affected industries. We conducted our work from September 2006
    through August 2007 in accordance with generally accepted government
    auditing standards. Appendix I contains a more detailed description of our
    objectives, scope, and methodology.

    Results in Brief

    Ex-Im has established procedures to identify applications for projects
    that have the greatest potential to adversely affect U.S. industry and to
    subsequently conduct detailed analyses of those identified projects. All
    applications are screened for economic impact on the basis of a number of
    criteria either explicitly mentioned in the Export-Import Bank Act of
    1945, as amended (also referred to as Ex-Im's charter)^3 or introduced by
    the bank in the exercise of its discretion under the charter. Ex-Im's
    first screen removes from further review applications that do not increase
    foreign production of an exportable good. Then, it screens out
    applications that would support a product subject to trade sanctions, or
    goods that Ex-Im has deemed to be "undersupplied" (oil and gas or
    diamonds). Next, Ex-Im removes from the process applications requesting
    financing of $10 million or less; these projects are reviewed for economic
    impact in the aggregate after the financing is authorized. Finally, Ex-Im
    conducts a "1 percent test" to determine whether financed projects are
    likely to result in "substantial injury." Ex-Im removes from the economic
    impact process those requests to finance projects that would increase
    foreign production by less than 1 percent of U.S. production. Requests to
    finance projects that would increase foreign production by 1 percent or
    more of U.S. production are held for detailed analysis. Between fiscal
    years 2003 and 2005, this screening process identified 20 applications for
    detailed economic impact analysis. In the detailed analysis, Ex-Im
    assesses whether the product that will result from the financing will be
    in surplus on world markets or in competition with U.S. production, and
    estimates a net impact of the transaction on U.S. trade flows. Ex-Im also
    solicits comments from the public and certain U.S. government agencies.
    Between fiscal years 2003 and 2005, Ex-Im ultimately approved financing
    for 525 (or about two-thirds) of the 771 applications that it determined
    through the first screen were applicable for further review, totaling
    approximately $6.1 billion.

    ^312 U.S.C. 635, et seq.

    We identified challenges and areas for improvement in Ex-Im's economic
    impact process. Determining the economic impact of financing a project is
    an inherently challenging process that requires defining which products
    and geographic markets will be affected and projecting future market
    trends. Among the screens Ex-Im introduced to identify applications for
    detailed analysis, we found that the screen that removes projects
    involving oil and gas or diamonds from further analysis has been
    effective. However, the effectiveness of Ex-Im's $10 million screen is
    uncertain because Ex-Im has not conducted an analysis to determine the
    extent to which the screen identified applications whose projects could
    meet the statutory definition of substantial injury (producing 1 percent
    or more of U.S. production in an industry). For example, we learned of a
    $9.9 million transaction screened out of the analysis that would allow a
    foreign company to produce an estimated 3.5 percent of U.S. production.^4
    We also identified areas that could be improved in the methods Ex-Im used
    in its detailed analyses. These areas include inconsistencies and
    limitations in how Ex-Im has estimated potential costs to U.S. producers
    from increased foreign competition, which can significantly affect
    estimates of negative effects on those producers. In addition, Ex-Im's
    characterization of its financing effect on the U.S. trade balance can be
    clarified. Finally, the internal controls Ex-Im uses to ensure that the
    screening process and the detailed analysis are conducted consistently and
    accurately could be strengthened.

    ^4Limitations in data supplied by Ex-Im did not allow us to do a thorough
    review of requests for financing below $10 million.

    We found that the transparency of Ex-Im's economic impact process is
    limited.^5 While Ex-Im does publicly post its procedures, they contain
    areas of ambiguity. For example, the procedures do not define the term
    "oversupply"--a key factor in the analysis--or when it would apply the
    concept of "proportionality."^6 In addition, Ex-Im has not provided to the
    board of directors all public comments that it received concerning
    applications analyzed for economic impact. We also identified two
    practices--referencing the list of sectors likely to receive extra
    scrutiny in the procedures and publicizing final economic impact
    conclusions--that could increase the predictability of the process.

    To improve Ex-Im's identification and analysis of applications for
    economic impact, we recommend in this report that the Chairman of the
    Export-Import Bank of the United States (1) review the $10 million
    threshold to determine whether additional steps are needed to mitigate the
    risk of exempting from more detailed review applications that could meet
    the definition of substantial injury (e.g., these steps could include
    selectively reviewing transactions that would affect relatively small U.S.
    industries or sensitive sectors); (2) create specific methodological
    guidelines for staff analyzing applications for economic impact, bearing
    in mind relevant Office of Management and Budget (OMB) guidance where
    appropriate; and (3) improve Ex-Im's internal controls. To improve the
    public transparency of the economic impact process for interested and
    affected parties, we also recommend that the chairman (1) clarify publicly
    available procedures, (2) cite the list of sensitive sectors in the
    economic impact procedures, and (3) publicize final economic impact
    decisions. We provided a draft of this report to the Export-Import Bank of
    the United States. Ex-Im generally concurred with our recommendations and
    stated that it will continue to explore feasible ways to improve the
    economic impact procedures and make the process more consistent and
    user-friendly.

    ^5We use the term "transparency" to mean the full, accurate, and timely
    disclosure of information.

    ^6Under proportionality, Ex-Im calculates economic impacts on the basis of
    the proportion of its financing related to the overall project value.

    Background

    Ex-Im is the official export credit agency^7 of the United States, and
    operates under the authority of the Export-Import Bank Act of 1945, as
    amended. It operates as an independent agency of the U.S. government with
    a staff of approximately 370 full-time permanent employees. Ex-Im's core
    mission is to support U.S. exports and jobs by providing export financing
    that is competitive with the official export financing support offered by
    other governments. To accomplish its mission, Ex-Im offers a variety of
    financing instruments, including loan guarantees, export credit insurance,
    and working capital guarantees for preexport financing.^8 Between fiscal
    years 2003 and 2005, Ex-Im processed a yearly average of 3,055 requests
    for loans, guarantees, and insurance.^9 Of the processed applications,
    Ex-Im approved an average of 2,981 applications (or 98 percent) per year.

    In general, Ex-Im's charter prohibits the bank from extending financing
    for a project if doing so will adversely affect U.S. industry.^10 Ex-Im
    tests for adverse effects by (1) reviewing projects for applicable trade
    sanctions and (2) conducting its own economic impact analysis. For this
    economic impact analysis, the charter provides that, if a commodity for
    export resulting from Ex-Im financing will compete with U.S. production of
    the same, similar, or competing commodity, or will be in surplus on world
    markets at the time of first production, Ex-Im must determine whether
    extending the financing will cause substantial injury to U.S. producers.
    (The charter defines "substantial injury" as the establishment or
    expansion of foreign production capacity equal to or exceeding 1 percent
    of U.S. production.) However, under its charter, Ex-Im may fund a project
    if, in the judgment of the board of directors, the short- and long-term
    benefits to industry and employment in the United States are likely to
    outweigh the injury to U.S. producers and employment of the same, similar,
    or competing commodity. This can put Ex-Im in the challenging position of
    balancing the interests of two different industries--the industry of the
    U.S. exporter it is financing and the industry that may face additional
    competition as a result of the initial export (see fig. 1).

    ^7According to the Organisation of Economic Cooperation and Development
    (OECD), export credit agencies provide export credits in support of
    national exporters competing for overseas sales. Export credit agencies
    provide credits to foreign buyers either directly or via private financial
    institutions benefiting from their insurance or guarantee cover. Export
    credit agencies can be government institutions or private companies
    operating on behalf of the government. Many other OECD member countries
    also have export credit agencies, such as Canada, France, Germany, Japan,
    and the United Kingdom.

    ^8Ex-Im also provides a small number of direct loans, which are primarily
    used to offer concessionary financing to U.S. exporters to match
    concessionary financing by other countries' export credit agencies. For
    additional information regarding Ex-Im products, see Ex-Im's official Web
    site at [43]http://www.exim.gov .

    ^9Ex-Im defines a transaction as "processed" if an application has been
    received and then authorized, denied, or withdrawn or if funds have been
    disbursed.

    ^10An economic impact consideration was first incorporated into Ex-Im's
    charter in 1968 and has been subsequently modified.

    Figure 1: A Conceptual Illustration of How Ex-Im Provides Financing to
    Foreign Companies but Risks Creating a Negative Impact on U.S. Producers

    Economic impact is one of many factors Ex-Im considers when determining
    whether to finance a project. Other factors that Ex-Im must weigh include
    the project's feasibility from an engineering point of view, the project's
    possible environmental impact, whether the project involves small
    business, and the borrower's creditworthiness.

    Other countries, such as Japan and the United Kingdom, also have export
    credit agencies with broad mandates to finance projects that benefit their
    domestic economies. However, unlike Ex-Im, these export credit agencies
    are not required to weigh the potential economic costs to domestic
    industries against the benefits associated with a specific financed
    export. Furthermore, these agencies do not consider the relevance of trade
    measures to a project, as Ex-Im is required to do. In its 2005
    competitiveness report,^11 Ex-Im states that having to consider these
    additional elements, such as the economic impact, when deciding whether to
    finance a project puts Ex-Im at a disadvantage compared with other export
    credit agencies.

    Economic Impact Analysis Screening Process Identifies Projects for Detailed
    Analysis

    Ex-Im's economic impact analysis screening process is designed to identify
    projects with the most potential to adversely impact U.S. industry; Ex-Im
    then conducts a detailed analysis of those projects. Applications are
    sequentially screened on the basis of criteria specified in Ex-Im's
    charter or established by Ex-Im in the exercise of its discretion under
    the charter. For the applications that receive a detailed analysis, Ex-Im
    assesses whether the products that will result from its financing will be
    in surplus on world markets or in competition with U.S. production, and it
    estimates the net impact of the projects on U.S. trade flows. Ex-Im also
    solicits public and agency comments on the potential projects. Between
    fiscal years 2003 and 2005, Ex-Im approved most of the 771 requests to
    finance projects that involved increasing foreign production of an
    exportable good, and that, therefore, passed the first screen and were
    deemed applicable for further economic impact review.

    ^11Ex-Im, Report to the U.S. Congress on Export Credit Competition and the
    Export Import Bank of the United States (Jan. 1, 2005, through Dec. 31,
    2005).

    Ex-Im Uses a Screening Process to Identify Projects for Detailed Analysis

    Ex-Im's economic impact analysis screening process consists of a series of
    rules used to sequentially remove from further economic impact review
    applications for projects it deems unlikely to adversely impact U.S.
    industry. Ex-Im's charter explicitly requires certain screens and Ex-Im
    introduced others, using its discretion under the charter. Between fiscal
    years 2003 and 2005, the screens identified 20 applications that required
    a detailed analysis. The screens remove most requests from the process
    because they involve financing of $10 million or less; however, Ex-Im
    reviews those projects postauthorization in its Annual Review of Economic
    Impact.

      Ex-Im's Charter Specifies Some Analytic Screens, Ex-Im Introduced Others

    Ex-Im screens applications for economic impact on the basis of several
    characteristics, some that Ex-Im's charter explicitly requires, others
    that Ex-Im established exercising its discretion under the charter. During
    the screening process, Ex-Im staff in the Policy Analysis Division assign
    an economic impact code to each application. These screens are as follows:

               o Foreign production of an exportable commodity. Ex-Im's charter
               requires it to review for economic impact those requests to
               finance projects that would result in increased foreign
               production. Under Ex-Im's procedures, only requests financing the
               export of capital goods or services from the United States that
               might allow a foreign company to increase production of an
               exportable good are subject to further scrutiny. This screen
               removes the bulk of applications from economic impact analysis.
               (Ex-Im codes requests to finance projects that do not increase
               foreign production as "not applicable," or NA.)
               o Trade measures. Ex-Im's charter requires it to consider whether
               trade measures--antidumping or countervailing duty orders^12 and
               section 201 injury determinations^13--apply to products that would
               result from Ex-Im financing. According to Ex-Im officials, Ex-Im
               does not fund projects directly subject to trade measures as a
               matter of practice, although it has the authority to do so if the
               board determines that a project's benefits outweigh its costs.
               This screen removes applications whose projects are subject to
               trade measures not just from further economic impact analysis, but
               from eligibility for Ex-Im financing. (Ex-Im codes these requests
               as "trade sanctions," or TS.)
               o Foreign production of oil and gas or diamonds--"undersupplied"
               products. Ex-Im has determined, with input from other agencies,
               that all projects increasing the foreign production of oil and gas
               or diamonds are unlikely to adversely impact the U.S. economy.
               This screen removes requests to finance projects involving oil and
               gas or diamonds from further economic impact analysis. (Ex-Im
               codes these requests as "undersupplied," or US.)
               o Financing threshold of $10 million. Ex-Im presumes that projects
               requesting financing of $10 million or less are too small to
               adversely impact the U.S. economy. According to a senior Ex-Im
               official, Ex-Im selected $10 million as the threshold because that
               figure is used for a variety of other bank purposes, including
               whether applications should be reviewed by the board of directors
               or should receive an environmental assessment. The official also
               stated that the use of this threshold is reasonable for the
               economic impact process because $10 million financing is likely to
               result in little foreign production and, therefore, is not likely
               to adversely impact the U.S. economy. This screen removes
               applications requesting financing of $10 million or less from
               further economic impact analysis prior to final financing
               decisions (although these requests are subject to an annual review
               after authorization, which we describe later). (Ex-Im codes these
               requests as "annual review," or AR.)^14
               o One percent substantial injury test. Ex-Im's charter requires it
               to conduct a detailed economic impact analysis when a project will
               cause "substantial injury," defined as an increase in foreign
               production greater than or equal to 1 percent of U.S. production
               of the same or a similar good. To conduct this test, Ex-Im
               calculates a simple ratio of the expected increase in foreign
               production resulting from the project to current U.S. production
               in that industry. Ex-Im's procedures also allow for the use of
               "proportionality" in conducting the 1 percent test, which Ex-Im
               defines as the relation of the dollar value of the Ex-Im-financed
               U.S. component of the project to its overall cost.^15 This screen
               removes applications whose projects would increase foreign
               production by less than 1 percent from further economic impact
               analysis. (Ex-Im codes these requests as "no substantial injury,"
               or NSI.)

               The remaining applications are subject to detailed analysis.
               (Ex-Im codes these requests as "hold for analysis," or HA.) See
               figure 2 for information on how Ex-Im categorizes applications
               throughout the screening process.

    ^12As defined in Title VII of the Tariff Act of 1930.

    ^13As defined in Title II of the Trade Act of 1974. This legislation
    requires Ex-Im to consider final and preliminary determinations that may
    apply to the foreign production.

    ^14Ex-Im also codes Credit Guarantee Facilities and Medium Term Risk
    transactions as "annual review," regardless of the transaction's value.

    ^15Ex-Im's procedures note that proportionality "shall not be the only
    element used to avoid a full economic analysis."

    Figure 2: Ex-Im's Process for Screening Applications, Assigning Economic
    Impact Codes, and Selecting Projects for Detailed Economic Impact Analysis

    aNumbers are based on Ex-Im data for applications during fiscal years 2003
    through 2005; procedures are based on the Ex-Im charter reauthorized in
    2002.

    ^bEx-Im also codes Credit Guarantee Facilities and Medium Term Risk
    transactions as "annual review," regardless of the transaction's value.

      Few Applications Receive a Detailed Analysis

    The screens Ex-Im uses in its economic impact analysis identify a small
    share of applications for detailed analysis. Between fiscal years 2003 and
    2005, the vast majority of applications was determined not to support
    foreign production of exportable goods and, therefore, was not applicable
    for economic impact analysis. Of the 771 requests that involved foreign
    production of an exportable good and that, therefore, were applicable for
    economic impact analysis, 679 were eliminated from the process because
    they were $10 million or less. Of the remaining 92 applications, 72 were
    eliminated by other screens and 20 were held for detailed analysis.^16
    Figure 3 illustrates the composition of applications by screening
    category, both in terms of the number of projects and the dollar value of
    applications.

    ^16Ex-Im identified and began a detailed analysis for 20 applications
    between fiscal years 2003 and 2005. Three applications were withdrawn by
    the applicants before the detailed analyses were completed. Three
    applications were withdrawn by the applicants after the detailed analyses
    were completed, but before the board of directors made a final financing
    decision. Fourteen applications received a complete detailed analysis and
    a final board decision. We also reviewed some applications that received a
    detailed analysis in fiscal years 2002 and 2006; appendix II contains a
    list of all analyses begun during fiscal years 2002 through 2006.

    Figure 3: Economic Impact Categorization of Ex-Im Applications That Were
    Acted Upon, by Number and Value (Fiscal Years 2003-2005)

      Projects Financed for $10 Million or Less Are Reviewed Postauthorization

    At the end of every fiscal year, Ex-Im aggregates projects it financed for
    less than $10 million by foreign buyer, and then by product, to determine
    if, collectively, a buyer's portfolio of projects meets the definition of
    substantial injury.^17 Ex-Im staff report their findings in a document
    entitled Annual Review of Economic Impact Cases. Ex-Im cannot rescind
    funding if it finds after the review that a buyer's projects collectively
    meet the definition of substantial injury.

    When Congress reauthorized Ex-Im's charter in 2006, it introduced a new
    process to ensure that smaller projects do not collectively meet the
    definition of substantial injury. The new legislation requires Ex-Im to
    review a foreign borrower's requests on an ongoing basis, aggregating its
    applications over the previous 24 months to ensure that its financed
    portfolio does not surpass $10 million. If the aggregate financing does
    exceed $10 million, the bank must subject the entire aggregate production
    from the proposed project and relevant projects approved during the
    preceding 24-month period to further economic impact analysis. According
    to Ex-Im's revised procedures, only the most recent, proposed project will
    be affected by the results of this economic impact scrutiny.

    ^17Between fiscal years 2002 and 2006, Ex-Im only identified one such
    buyer whose portfolio on financed projects exceeded the $10 million dollar
    threshold in a single fiscal year. The bank conducted an economic impact
    review and concluded these projects did not produce 1 percent or more of
    U.S. production.

    Detailed Economic Impact Analysis Assesses Oversupply, Competition, and Net
    Trade Impacts

    For applications that remain after the screening process, Ex-Im conducts a
    detailed analysis. The detailed analysis's components are designed to
    address specific legislative requirements, including comments solicited
    from the public and relevant U.S. government agencies. Ex-Im compiles its
    findings, along with its conclusion regarding whether the project will
    negatively impact the U.S. economy, in a memorandum to the board of
    directors. (See app. II for a list of applications for which Ex-Im began a
    detailed economic impact analysis between fiscal years 2002 and 2006.)

    In its detailed economic impact assessments, Ex-Im addresses the specific
    statutory requirements concerning the assessment of whether a foreign
    product will be in surplus in world markets or in competition with U.S.
    production, and estimates an overall impact on trade flows. The components
    of this analysis include (1) an assessment of whether the foreign product
    potentially supported by Ex-Im financing will be in surplus on world
    markets--which Ex-Im terms as being "in oversupply," (2) an estimate of
    U.S. production that could be displaced by competition with the increased
    foreign production, and (3) the net impact on U.S. trade flows. According
    to its procedures, Ex-Im assesses whether the product to be produced by
    the foreign buyer is in oversupply using a set of indicators that include
    trade measures, such as antidumping duties on related products, and
    stagnating global prices.^18 Finally, Ex-Im estimates the net effect on
    the U.S. economy by comparing the trade flows associated with the initial
    U.S. export and any follow-on, spare-part sales with the potential
    displaced production. This net economic impact assessment provides the
    type of analysis that, according to a senior Ex-Im official, could be
    informative to a board of directors' decision to exercise its discretion
    in approving applications where, for example, foreign production could
    compete with U.S. producers and represents 1 percent or more of U.S.
    production.

    ^18As we have previously mentioned, Ex-Im as a matter of policy does not
    finance exports to produce products in countries where there are current
    trade sanctions on those products. In its detailed economic impact
    analyses, Ex-Im may consider trade measures on related products or
    identical products in other countries.

    Ex-Im's charter also requires it to solicit public comments. Ex-Im
    publishes a public notice in the Federal Register when beginning a
    detailed analysis and allows for a 14-day public comment period. For the
    applications we reviewed, Ex-Im's public notices contained (1) the
    project's value, (2) the country where the foreign borrower was located,
    (3) the goods to be produced, (4) the expected resulting amount of
    increased production of that good, and (5) the potential areas where the
    end product would be marketed. We found that Ex-Im consistently posted
    Federal Register notices containing the requisite information. The 2006
    reauthorization codifies that practice and also requires Ex-Im to include
    information about the amount of the financing involved. In addition, the
    new legislation requires the bank to publish a revised public notice and
    allow for another comment period if a project changes materially.^19 Ex-Im
    also consistently solicited comments on draft analyses from relevant U.S.
    government agencies: the Departments of Commerce, State, and the Treasury
    and the Office of the U.S. Trade Representative (USTR). The 2006
    reauthorization codifies that practice and additionally requires Ex-Im to
    notify relevant congressional committees that it is conducting a detailed
    economic impact analysis.^20

    Ex-Im staff create an economic impact memorandum that is used to describe
    their findings, along with their conclusion regarding whether the project
    is likely to have a positive or negative impact on the U.S. economy.

    Ex-Im Approved Most Projects Applicable for Economic Impact Review between
    Fiscal Years 2003 and 2005

    Between fiscal years 2003 and 2005, Ex-Im approved financing for about
    two-thirds of the projects that involved foreign production of a
    exportable good, and that, therefore, were applicable for economic impact
    review. When reviewing applications, Ex-Im's board of directors considers
    economic impact and other factors. Ex-Im's 2006 reauthorization requires
    the bank to provide a nonconfidential summary of the facts found and
    conclusions reached in any detailed economic impact analysis to the
    affected party, when requested.

    ^19The term "material change," with respect to an application, includes a
    change of at least 25 percent in the amount of Ex-Im financing requested
    in the application and a change in the principal product to be produced by
    the foreign buyer.

    ^20Relevant congressional committees include the Senate Committee on
    Banking, Housing, and Urban Affairs and the House Committee on Financial
    Services.

    Ex-Im considered 771 applications applicable for economic impact review
    between fiscal years 2003 and 2005 and approved 525 projects, or 67
    percent, which represented approximately $6.1 billion in financing. Of the
    approved projects, most had been removed from the economic impact process
    because the financing value was $10 million or less; however, these
    projects represented a relatively small portion of the approved financing
    ($615 million). Conversely, applications removed from the economic impact
    process because the project involved an "undersupplied" sector comprised a
    small number of approved projects (49) but the majority of approved
    financing ($3.8 billion). Of the 20 applications held for detailed
    analysis, Ex-Im approved 11, representing $1.7 billion. Figure 4 compares
    the number of approved projects by each economic impact code with the
    respective dollar value.

    Figure 4: Comparison of Number and Dollar Value by each Economic Impact
    Code for the 525 Approved Applicable Projects (Fiscal Years 2003-2005)

    The board or its designee^21 decides whether to approve or deny any
    application on the basis of the economic impact designation in conjunction
    with many factors, including several other evaluations, such as an
    engineering feasibility study, an environmental impact assessment, and
    credit information about the applicant and the project. For those
    applications that undergo a detailed analysis, Ex-Im's charter provides an
    exception that allows the board to approve the application if it finds
    that the short- and long-term benefits to industry and employment in the
    United States outweigh the costs to U.S. producers of a competing good.
    Under this authority, the board of directors could approve an application
    even if the staff concluded that the project would create a negative
    economic impact.

    The 2006 reauthorization requires Ex-Im to provide affected parties with a
    nonconfidential summary of the facts and conclusions of any detailed
    economic impact analysis within 30 days of receiving a written request.
    Prior to the reauthorization, Ex-Im published the board of directors'
    financing decisions, but not information on whether the bank had conducted
    an economic impact analysis or the analysis's findings.

    Challenges and Limitations Exist in Identifying and Analyzing Projects for
    Economic Impact

    We identified substantial challenges and certain limitations in Ex-Im's
    economic impact process. Determining the economic impact of a project is
    an inherently challenging process that requires defining which products
    and geographic markets will be affected and projecting future market
    trends. With respect to Ex-Im's screening of applications to identify
    those for detailed analysis, we found varying effectiveness; the
    effectiveness of the $10 million threshold used by Ex-Im is uncertain and
    has not been analyzed by Ex-Im. We identified certain methods used in the
    detailed analysis that could be improved. These methods featured
    inconsistencies and limitations in how Ex-Im has estimated potential costs
    to U.S. producers related to their production being displaced over time by
    increased foreign competition. Also, how Ex-Im characterizes the net
    effect of its financing on the U.S. trade balance can be clarified. In
    addition, Ex-Im's internal controls could be strengthened to better ensure
    that the identification process and analysis is conducted consistently and
    accurately.

    ^21All authority to approve or deny applications stems from the board of
    directors. The board generally reviews all applications over $10 million.
    It has delegated authority to the Credit Committee to approve or deny
    medium-term transactions (generally speaking, those that are less than $10
    million). The board has also delegated decision authority to individuals
    for certain categories of financing.

    Screens Used to Identify Applications for Detailed Analysis Vary in
    Effectiveness

    While the number of applications for financing received by Ex-Im annually
    creates challenges in assessing all potential applications for economic
    impact, we found that the screens Ex-Im established using its discretion
    under the charter varied in effectiveness. Excluding requests to finance
    projects in the oil and gas sector and the diamond sector from detailed
    economic impact analysis because they are undersupplied has been an
    effective screen; however, the effectiveness of the $10 million screen is
    uncertain.

      Volume of Applications Creates Challenges in Screening for Economic Impact

    The number of applications for financing received by Ex-Im annually
    creates challenges in assessing all potential applications for economic
    impact. As we have previously discussed, Ex-Im processed 9,255 requests
    for financing from fiscal years 2003 through 2005, 771 of which involved
    foreign production of an exportable good and, therefore, were applicable
    for economic impact review. While Ex-Im reviews all applications for
    potential economic impact, the additional procedures it has introduced to
    screen out projects that are unlikely to have an adverse impact on U.S.
    producers are also intended to more effectively allocate Ex-Im's limited
    resources.

      Exemption of "Undersupplied" Sectors from Analysis Has Been Effective

    Ex-Im's exclusion of the oil and gas sector and the diamond sector from
    detailed analysis because they are "undersupplied" has been an effective
    tool developed with input from other agencies and previous analyses in
    those sectors. Ex-Im initially developed a list of 31 natural resource
    sectors for which imports accounted for more than 50 percent of U.S.
    consumption as potentially "undersupplied." Ex-Im reduced the list to 2
    sectors (Ex-Im designated oil and gas as a single sector) with input from
    the U.S. government agencies that review the detailed analyses and the
    Department of Energy. Importantly, Ex-Im officials stated that, in the
    past, economic impact analyses of applications for projects in these
    sectors had always yielded a positive impact on the U.S. economy, and
    that, because these sectors were natural resources, the United States had
    limited ability to expand production domestically. Ex-Im created the
    undersupplied list to more effectively allocate its resources.

      Effectiveness of the $10 Million Threshold Has Not Been Determined

    The $10 million threshold's effectiveness as a screen is uncertain because
    Ex-Im has not determined the extent to which it identifies projects that
    could meet the statutory definition of substantial injury. As we have
    previously discussed, the threshold was chosen, in part, on the basis of
    other Ex-Im practices that are triggered at $10 million, such as a board
    review and an environmental impact assessment. Ex-Im officials stated that
    requests for financing $10 million or less would generally be too small to
    increase foreign production by 1 percent or more of U.S. production.
    However, Ex-Im has not conducted an analysis to support that the $10
    million threshold captures the appropriate projects. In theory, even a
    relatively small export of capital goods or services could be used to
    produce 1 percent or more of production in a small U.S. industry.^22 More
    generally, the dollar value of a capital good project can be an imperfect
    signal of the size of the project in terms of its production as a
    percentage of the corresponding U.S. industry. For example, Ex-Im
    estimated that a $14 million export of equipment to Russia would allow
    production of polystyrene to expand by 1.4 percent of U.S. polystyrene
    production. In contrast, Ex-Im estimated that a $16.25 million export of
    mining equipment to Japan would allow a foreign company to produce roughly
    14.6 percent of annual titanium production in the United States.

    We learned of or identified two requests for financing less than $10
    million whose projects were associated with estimated foreign production
    of over 1 percent of U.S. production in an industry; data limitations did
    not allow us to do a thorough review of projects with a financed value of
    $10 million or less. First, an export of $9.9 million of ethanol
    dehydration equipment to Trinidad would allow a foreign company to produce
    an estimated 3.5 percent of U.S. production of anhydrous ethanol. We
    learned of the ethanol project because Congress required Ex-Im to conduct
    a postapproval detailed analysis in the Consolidated Appropriations Act of
    2004. Second, we identified a $9.8 million export of mining equipment that
    would allow a foreign company to produce an estimated 1.73 percent of
    production in a U.S. industry. We identified the mining project when we
    attempted to sample 10 applications requesting financing for $10 million
    or less, from a universe of 80 applications between $5 and $10 million, to
    examine whether they resulted in foreign production equal to or greater
    than 1 percent of U.S. production in an industry.^23 Of the 10 capital
    good exports in our sample, Ex-Im could provide information on the amount
    of production for 2--1 of which was the $9.8 million mining project that
    we have previously described.^24 Thus, we were largely unable to determine
    the extent to which Ex-Im's $10 million threshold screened out
    applications that would have met the 1 percent substantial injury test.
    The mining project and the ethanol project, while treated in accordance
    with Ex-Im's procedure to exclude requests for financing $10 million or
    less from detailed economic impact analysis, indicate that requests of $10
    million or less can be associated with production of over 1 percent of a
    corresponding U.S. industry. As we have previously noted, the 1 percent
    threshold is an important legislative criterion because it establishes
    whether a project meets the definition of substantial injury.

    ^22For example, according to the Census Bureau's Survey of Manufactures,
    roughly one-fourth of manufacturing industries at the seven-digit NAICS
    level (one definition of industries based on the North American Industrial
    Classification System) had annual shipments of less than $300 million in
    2005.

    ^23We judgmentally selected a sample of 10 capital good projects
    requesting financing of $10 million or less. All 10 applications in the
    sample were between $5 and $10 million, and most were between $7 and $10
    million. The sample was drawn from 80 applications that were approved, had
    funds disbursed, or were denied between fiscal years 2002 and 2005.

    Detailed Analysis Has Challenges and Certain Limitations

    Determining the economic impact of a project is an inherently challenging
    process; however, we identified limitations in certain assumptions Ex-Im
    makes to estimate potential costs to U.S. producers, and in how it
    characterizes the net effect of its financing on the trade balance.

      Detailed Analysis Has Inherent Challenges

    The modeling of international economic markets to determine the impact of
    government decisions and policies, including Ex-Im financing decisions,
    features a number of inherent challenges. Simplifications are always
    necessary to model complex economic interactions, and, even under
    simplified assumptions, precise data may not exist to address the question
    at hand.

    In some analyses, Ex-Im has found it challenging to define the industries
    that would be affected by Ex-Im-supported production, both in terms of
    products and geographic extent, a determination that will also influence
    estimates of the costs to U.S. producers. To calculate displaced
    production, Ex-Im must define the relevant industry, determine the
    regional or global markets in which there could be competition with U.S.
    producers, and collect trade and consumption data that are based on those
    markets. One case where Ex-Im officials noted challenges in obtaining the
    appropriate product data concerned a project supporting a denim plant in
    Turkey. To estimate potential displacement of U.S. denim exports, Ex-Im
    used data on U.S. exports of high-cotton-content denim (to reflect the
    Turkish manufacturer's plan to produce "high-end" jeans). However, Ex-Im
    stated there was a lack of data on broader supply-and-demand factors for
    this denim--such as global capacity utilization for denim plants--and,
    thus, Ex-Im relied on projections for the price of jeans because 85
    percent of all denim is used to produce jeans. In addition, an analysis of
    a semiconductor production facility in Singapore also illustrates market
    definition challenges. Ex-Im identified a type of "leading edge"
    semiconductor as the relevant product market, but also noted that because
    of the on-demand nature of production in the facility, it was difficult to
    conduct a trade flow analysis or determine potential displacement of
    semiconductors made in the United States.^25 Defining the industry
    appropriately and collecting data to match that definition is an inherent
    challenge in conducting an analysis of this kind.

    ^24An Ex-Im official stated that, in general, only large project finance
    transactions require information on increased production capacity for the
    bank's credit underwriting (since Ex-Im bases the project's
    creditworthiness on the project's future potential). Credit decisions for
    smaller projects are often based on criteria such as the borrower's credit
    history, financial statements, and the bank's experience with the
    exporter. There is no standard procedure for collecting or capturing
    production data, particularly for small applications (i.e., $10 million or
    less).

    More broadly, the full economic impact on U.S. industries of projects
    financed by Ex-Im depends on determinations or assumptions regarding what
    would happen in the absence of the financing. For Ex-Im, predicting these
    effects can involve determining or making assumptions regarding (1) what
    would happen to U.S. productive resources if Ex-Im's financing for a
    project did not exist or (2) how global prices would evolve if new
    capacity were not added. Foreign competition for financing could also have
    implications for what would happen in the absence of Ex-Im financing. For
    example, if Ex-Im denied financing, the borrower might seek financing from
    another country's export credit agency, resulting in similar capacity
    being added abroad without the use of U.S. goods or services. However,
    because foreign competition for financing can exist for many projects, a
    senior Ex-Im official noted that the application of this rationale would
    risk undercutting other economic impact provisions. In contrast, if a
    particular U.S. exporter would supply a foreign producer whether Ex-Im
    financed the project or not, then those exports would not be in addition
    to what would happen without Ex-Im support.

    ^25According to Ex-Im, the semiconductors to be produced at the facility
    would generally be Application Specific Integrated Circuits for
    consumption in the sectors of communications, computers, and consumer
    electronics.

      Calculation and Presentation of Some Potential Costs Could Be Improved

    There are limitations in certain assumptions that Ex-Im has made to
    estimate potential costs to U.S. producers related to displaced production
    that is spread over time or lower prices for U.S. competitors, which are
    important elements of the detailed economic impact analyses.

        Calculation of Displaced U.S. Production

    There are limitations and inconsistencies in how Ex-Im has calculated
    displaced U.S. production that is spread out over time. In measuring the
    potential cost of Ex-Im financing to U.S. industries, Ex-Im staff
    generally begin by estimating the annual level of displaced production in
    specific countries where U.S. production is expected to compete with the
    production supported by the Ex-Im loan or guarantee. This estimate is
    based on how much of the increased foreign production will be sold to
    countries that U.S. producers also supply, and on the current U.S. market
    share in those countries. While Ex-Im rightly considers both the present
    and future costs and benefits of its projects, we identified limitations
    and inconsistencies in its estimates--including its assumptions regarding
    (1) whether displacement, when it occurs, will happen every year or every
    other year and (2) how Ex-Im accounts for expected growth in global demand
    for a product in its estimates of displaced production--that can reduce or
    eliminate the amount of displaced production as initially estimated. These
    assumptions can, in some cases, significantly affect estimates of
    displaced production and, hence, net economic impact. Importantly, OMB
    notes that in cost-benefit analyses, major assumptions should be varied to
    determine how sensitive outcomes are to changes in the assumptions.

    Ex-Im has sometimes used an every-other-year method of calculating
    displaced production that occurs over time. Assuming that U.S. production
    would be displaced only every other year can significantly reduce
    estimates of displaced production as compared with an annual approach; it
    can reduce the estimated displaced production by close to half. In one
    2005 case where Ex-Im used this approach, it estimated a net-positive
    trade impact with increased exports of $14.9 million and displaced
    production of $9.8 million over 8.5 years. Assuming every year
    displacement would have yielded a net negative impact. In a 2006 analysis,
    estimated costs were reduced from $221,000 to $123,000 by assuming that
    displacement would occur every other year, although in that case the
    estimated value of exports was substantially higher than the estimated
    displacement, so the assumption did not change the net trade effect
    estimate. Ex-Im has explained the use of every-other-year discounting on
    varying grounds, including normal supply-and-demand cycles and regular
    cyclical fluctuations in the industry. However, such cyclical fluctuations
    are not likely to reduce the level of displaced production relative to
    what would occur without Ex-Im's financing, because the cyclical variation
    is not induced by the additional capacity supported by Ex-Im. In contrast,
    Ex-Im did not use an every-other-year approach to displaced production in
    a case where it characterized the industry as cyclical.

    Ex-Im has assumed in some analyses that growing demand for the commodities
    it is analyzing would eliminate the initial amount of displaced production
    it estimated. For example, in an analysis of a potential facility to
    increase foreign production of polypropylene, Ex-Im assumed that an
    estimated $83 million in displaced U.S. production over 8 years would not
    actually be displaced because of growing global demand for polypropylene.
    However, this implicitly assumes that, in the absence of Ex-Im support for
    the larger facility, U.S. production would not have expanded on its own to
    take advantage of that growing demand.^26 Therefore, Ex-Im's estimate of
    displaced production will be highly sensitive to assumptions regarding how
    U.S. producers would meet growing world demand if new Ex-Im-supported
    capacity did not exist. Ex-Im made similar assumptions--that growing
    demand would offset potential displaced production--in an analysis of flat
    glass production in Mexico.^27 Officials at one agency from which Ex-Im
    solicits comments stated that these assumptions were very optimistic, and
    that a sensitivity analysis would be appropriate.

        Potential Costs Related to Lower Prices

    Ex-Im's method of estimating displaced production does not adequately
    acknowledge the potential costs to U.S. producers in some cases as a
    result of lower global prices. Ex-Im's methodology for estimating the
    economic losses to U.S. competitors does not capture indirect costs that
    are transmitted through changes in global market prices. As we have
    previously noted, the estimate of displaced production is focused on
    specific countries in which U.S. firms are expected to directly compete
    with the new foreign production. However, some costs to U.S. firms may
    come in the form of lower prices for homogeneous globally traded
    commodities, instead of directly displaced production.^28 These price
    changes could occur even in markets where there is no direct competition
    with the Ex-Im-supported foreign production, and should be acknowledged
    even if they cannot be calculated precisely. An official from one of the
    agencies that Ex-Im consults on economic impact also stated that one
    cannot necessarily assume that an increase in production in a single
    region will not affect global prices.

    ^26An Ex-Im official told us that the bank had not used this assumption
    since the Israel polypropylene analysis in 2005.

    ^27This application was withdrawn by the buyer after a draft economic
    impact analysis was prepared but prior to board consideration.

    For example, in a detailed analysis of the economic impact of a plant in
    Egypt that would produce ammonia, Ex-Im's estimate of the costs to
    domestic producers may not have captured the potential effect of lower
    global prices on those producers. Ex-Im stated that output from this plant
    was not expected to directly compete with U.S. ammonia exports. However,
    the United States procures ammonia globally and, therefore, is not
    insulated from even distant changes in market conditions. In comments
    provided to Ex-Im, industry officials also noted that because ammonia is a
    commodity, any increase in global supply would drive down prices.
    Similarly, in a detailed analysis of the economic impact of a plant in
    Israel that would produce polypropylene, Ex-Im focused on potential losses
    to U.S. producers in specific export markets. However, Ex-Im also noted in
    the analysis that polypropylene is a "bulk commodity that is widely traded
    and can easily be transported worldwide." This suggests that additional
    polypropylene capacity abroad could reduce the polypropylene prices faced
    by U.S. producers, even if they are not in direct regional competition
    with the new production.

    There are a number of potential techniques, which vary in complexity, to
    estimate or characterize the potential impact of certain types of Ex-Im
    financing on global prices. The United States International Trade
    Commission often uses sophisticated and resource-intensive economic models
    to estimate an array of effects of changes in U.S. trade policies on,
    among other things, the prices faced by U.S. producers. However, other
    less complicated and less resource-intensive techniques could be used to
    approximate the impact of global supply changes on prices.^29 According to
    OMB guidance, an enumeration of the different types of costs and benefits
    can be helpful in identifying the full range of potential effects, and, in
    addition, analyses should include a statement of the strengths and
    weaknesses of assumptions. Ex-Im officials stated that the separate
    assessment of oversupply should address some of these price effects.
    However, while the oversupply analysis may indicate the overall direction
    of global prices, it is not intended to measure the impact of
    Ex-Im-supported production on global prices or the potential effect of
    relatively lower prices on U.S. producers.

    ^28Prices would not necessarily fall in absolute terms, but they might be
    lower than would be the case in the absence of Ex-Im financing.

    ^29For example, existing estimates of the price elasticity of demand for
    an industry's product could be used to estimate the impact of changes in
    global supply on prices.

      Characterization of Financing Effect on Trade Balance Can Be Clarified

    Ex-Im's characterization of its net trade flow analysis as reflecting
    impacts on the overall U.S. trade balance is misleading and can be
    clarified. As we have previously noted, a net comparison of how trade in
    two industries--the exporting industry and U.S. producers of the
    foreign-produced good--would be affected by Ex-Im financing is a key
    component of the detailed analyses. In its economic impact memorandums
    concerning its detailed analyses, Ex-Im generally presents the amount of
    this estimated net impact as a change in the U.S. trade balance, stating
    that the trade balance will "improve" by the full dollar value of the
    exports it finances, less lost production. This characterization is
    misleading because the incremental impact of Ex-Im financing is likely to
    be less than the total value of those exports.^30 Economists generally
    agree that the aggregate trade balance is largely determined by
    macroeconomic factors, especially the domestic balance between savings and
    investment. Thus, the incremental impact of Ex-Im financing is likely to
    be much smaller than the total value of U.S. exports supported by Ex-Im or
    the total value of displaced production. However, while the size of the
    impact on the U.S. balance of trade is overstated, Ex-Im's conclusions
    about net economic impact are likely to have been unaffected by this
    practice because these cost and benefits are both overstated.

    ^30OMB guidance for cost-benefit analyses by federal agencies, for
    example, states that calculations should be based on incremental benefits
    and costs. In particular, OMB notes that "analyses should take particular
    care to identify the extent to which a policy such as a subsidy program
    promotes substitutes for activities of a similar nature that would occur
    without the policy." In this case, Ex-Im financing may promote the use of
    productive capacity in the United States that could find similar or
    alternative use even in the absence of Ex-Im support. For example, the
    firm that owns the productive capacity would seek other buyers for its
    products, although perhaps selling them later or at less favorable prices.

    Controls on Ex-Im's Economic Impact Process Could Be Strengthened

    We found that the internal controls Ex-Im uses to ensure the accuracy of
    its economic impact identification and analysis process could be
    strengthened. According to the Standards for Internal Control of the
    Federal Government,^31 internal controls should reasonably ensure the
    effectiveness and efficiency of operations and the compliance with
    applicable laws and regulations. Control activities include a wide range
    of diverse activities, such as training, approvals and verifications, and
    the creation and maintenance of related records that provide evidence of
    execution of these activities as well as appropriate documentation. The
    manner in which Ex-Im conducts at least three control activities does not
    reasonably ensure effective analyses. First, Ex-Im did not provide the
    employees conducting the analyses with formal training or guidance on how
    to conduct the analysis. Second, Ex-Im did not consistently document
    internal review of the analysts' work. Third, Ex-Im does not maintain
    documentation of certain important pieces of information. Without strong
    internal controls, Ex-Im cannot ensure that all requests for financing are
    appropriately analyzed.

      Limited Training or Systematic Guidance Was Provided on How to Conduct a
      Detailed Analysis

    Although appropriate training is a key internal control, Ex-Im provided
    the analysts with whom we spoke^32 with limited training or systematic
    guidance on how to conduct an economic impact analysis. According to the
    Standards for Internal Control of the Federal Government, management
    should ensure that employees have the required skills to achieve
    organizational goals. Training should be aimed at developing and retaining
    employee skill levels to meet changing organizational needs. According to
    the five analysts with whom we spoke, Ex-Im's training includes reading
    the economic impact procedures and previously conducted analyses and
    informal mentoring from coworkers. One analyst relied on a notebook
    compiled by his predecessor and another analyst relied on a template;
    however, according to bank officials, neither of these documents had been
    sanctioned by Ex-Im. This training and guidance may not be sufficient to
    ensure the use of the same fundamental, methodological approach across
    analyses, particularly given that the Policy Analysis Division, which is
    responsible for conducting the analyses, has had a lot of turnover since
    2002.^33

    ^31The Federal Managers' Financial Integrity Act of 1982 requires GAO to
    issue standards for internal control in government. The Standards for
    Internal Control of the Federal Government provide the overall framework
    for establishing and maintaining internal control and for identifying and
    addressing major performance and management challenges and areas at
    greatest risk of fraud, waste, abuse, and mismanagement. According to OMB,
    these standards are applicable to all executive agencies.

    ^32Between fiscal years 2002 and 2006, six Ex-Im staff members conducted
    the detailed economic impact analyses.

      Approvals and Verification Were Not Systematically Obtained

    Officials from the Policy Analysis Division stated that the economic
    impact analysts always consult with the engineers when conducting a
    detailed analysis because they provide important technical expertise;
    however, the engineers do not consistently approve final analyses.
    According to the Standards for Internal Control of the Federal Government,
    key duties and responsibilities need to be divided or segregated among
    different people to reduce the risk of error. This includes separating the
    responsibilities for reviewing the analyses. The Ex-Im policy division
    relies on the engineering division for industry-specific information. For
    example, the Engineering and Environment Division generally calculates the
    1 percent tests for all applications and helps the analysts define the
    appropriate commodity markets. In addition, engineers contact the
    exporters and borrowers to gather the technical information necessary to
    make those determinations. However, while the employee who conducted the
    analysis and the head of the policy division always signed the final
    economic impact analyses to denote their concurrence with the analysis,
    the engineers did not. Engineers signed only 6 of the 14 economic impact
    analyses for which the board of directors made final financing decisions.
    Ex-Im officials acknowledged that, although the policy division does
    consult with engineers for every detailed analysis, Ex-Im does not have
    any rigorous procedures prescribing when an engineer should sign an
    analysis. Without the consistent signatures denoting engineer review,
    Ex-Im loses an important layer of assurance that their analyses were
    accurately conducted.

      Ex-Im Does Not Maintain Some Important Documentation

    We also found that Ex-Im does not maintain documentation of important
    information concerning its detailed analyses. According to the Standards
    for Internal Control of the Federal Government, all transactions and other
    significant events need to be clearly documented, and the documentation
    should be readily available for examination. The policy division does not
    maintain records of the underlying data sources for its 1 percent test
    calculations, just the results of the calculations. Without the underlying
    data, the test cannot be replicated. The policy division also does not
    keep copies of draft analyses that it circulates to the reviewing agencies
    for their comments. The policy division also does not keep records of
    projects for which it began a detailed analysis, but which the applicants
    withdrew prior to the board making a final financing decision. A senior
    bank official noted that it probably would be a good idea for the policy
    division to start keeping files on the withdrawn data.

    ^33Of the 6 Ex-Im staff members who conducted the detailed economic impact
    analyses, 1 no longer works at Ex-Im. One analyst has changed positions
    within the bank and no longer works on detailed analyses. Two analysts
    work on the analyses as a collateral, rather than a primary, duty. Two
    analysts recently began working on the analyses.

      U.S. Government Agencies Have Provided an Important Review Function

    Commerce, State, Treasury, and USTR have played an important role in the
    quality assurance process regarding Ex-Im transactions that undergo a
    detailed economic analysis. In addition to specifically notifying these
    agencies when it begins a detailed analysis, Ex-Im provides them with a
    copy of the draft detailed analysis and asks that they provide their
    analytic and policy opinions. An Ex-Im official noted that the bank has
    voluntarily circulated the draft analyses to be as inclusive as possible,
    but it is not required to do so by its charter. Each of the four agencies
    reviews the detailed economic impact analysis in light of larger U.S.
    government policies, laws, and economic principles. The agencies often
    provided Ex-Im with important quality assurance feedback through informal
    dialogue. For example, when reviewing a draft of a transaction concerning
    denim, USTR noted in an e-mail to Ex-Im that the analysis had not
    considered how the end of textile quotas, which had happened just prior to
    the transaction's application for financing, would impact the global
    supply of textiles, including denim. Ex-Im modified its analysis to
    incorporate this consideration.

    In addition to providing quality assurance, the agencies' comments can
    influence a transaction's outcome. For example, when agencies expressed
    the opinion that steel production was in overcapacity, Ex-Im's staff
    changed their conclusion that the transaction would have a "net positive
    impact" to that the transaction would have a "net negative impact." In an
    early draft of a detailed analysis concerning direct reduced iron
    production, Ex-Im staff concluded that steel would not be in oversupply
    when the foreign buyer's factory came on-line. However, three of the four
    agencies disagreed with this assessment. According to the economic impact
    memorandum for this transaction, Ex-Im staff deferred to the collective
    expertise among the agencies and changed its conclusion.

    Ex-Im generally requests the agencies' comments 1 week after it circulates
    the draft detailed analysis to them. Several agency officials stated that
    1 week is not enough time to thoroughly review an analysis because of the
    complexity of the analysis and the need to get the views of those in
    official, senior-level positions on the analysis. However, some agency
    officials noted that Ex-Im does try to accommodate their requests for
    additional information and review time.

    Transparency of Economic Impact Procedures Has Limitations

    We found that some aspects of Ex-Im's economic impact process lacked
    transparency. While Ex-Im publicly posts their procedures, the procedures
    are difficult to understand and contain undefined terms. In addition,
    Ex-Im does not provide all public comments to its board of directors as
    required by its procedures.

    Publicly Available Procedures Contain Areas of Ambiguity

    Ex-Im's publicly available procedures do not clearly lay out how it
    analyzes applications for economic impact; therefore, interested parties
    are unable to reasonably assess their project's viability. In addition,
    Ex-Im could increase the process's transparency by referencing its list of
    sensitive sectors in its procedures and publishing the detailed analyses'
    outcomes.

      Economic Impact Process Is Not Easily Understood

    Ex-Im's procedures for analyzing applications are unclear to lenders and
    exporters directly involved in those projects, other industry officials,
    and U.S. government officials. According to Ex-Im's annual competitiveness
    report,^34 many lenders and exporters involved in projects requesting the
    bank's financial support expressed particular concern that the economic
    impact issue needs greater transparency and predictability. One exporter
    who participated in Ex-Im's annual competitiveness survey noted that,
    because the economic impact process is unpredictable, project sponsors may
    consider finding an alternative to the U.S. product and financing if the
    project would be subject to economic impact analysis. Industry officials
    with whom we spoke also generally noted that the process was not clear.
    One industry official called the process "a black box." Similarly,
    officials from one U.S. government agency with whom we spoke noted that
    Ex-Im's criteria and methodological assumptions were unclear.

      Ex-Im's Procedures Do Not Provide a Clear Basis for the Assessment of
      Oversupply

    Ex-Im's oversupply assessment--which can be a key factor in determining
    economic impact--lacks a clear basis because Ex-Im has not defined
    oversupply or matched the list of oversupply indicators in its procedures
    with those that they actually use. As we have previously noted, a
    determination of oversupply--Ex-Im's interpretation of the statutory
    consideration of whether production is in surplus on world markets--can be
    a basis for denial of an application. Ex-Im has also referred to
    information gathered in its assessment of oversupply in its determination
    of potential displaced production and, thus, its estimate of net economic
    impact. There is no generally accepted definition of oversupply, which
    Ex-Im's procedures and staff both acknowledge. In fact, the excess supply
    of a good over demand is not likely to be a persistent condition because,
    in most markets, prices will adjust to bring the supply of the good in
    balance with the demand. However, various indicators can provide
    perspectives on the outlook for supply and demand, and on whether
    expansions in capacity might come at a time of falling prices.

    ^34Ex-Im, Report to the U.S. Congress on Export Credit Competition and the
    Export Import Bank of the United States (June 2006).

    Ex-Im officials stated that they have not created an operational
    definition of oversupply to guide their assessment of it in detailed
    economic impact analyses. Instead, according to its procedures, Ex-Im
    analyzes transactions on a case-by-case basis and assesses oversupply
    according to a series of possible indicators. These indicators are as
    follows:

               o Final antidumping and countervailing duty orders on similar
               products elsewhere.^35
               o Section 201 investigations.
               o Stagnating or falling global prices.
               o Falling gross margins of domestic producers.
               o Industry bankruptcy and unemployment trends.
               o Trade Adjustment Assistance petitions.
               o Preliminary antidumping and countervailing duty determinations.
               o Multilateral production limitation agreements.

               Ex-Im has not generally used the more domestically focused
               indicators listed in its procedures to support conclusions
               regarding oversupply, and the procedures do not include a key
               indicator that it has used. Ex-Im officials stated that the
               oversupply assessment is made on a global basis. (Ex-Im's charter
               refers to surplus on "world markets.") However, most of the
               indicators listed in Ex-Im's procedures refer to laws, programs,
               or conditions in the United States that are not necessarily
               reflective of conditions on global markets. These include, for
               example, trade measures used by U.S. firms to mitigate the adverse
               effects of competition from foreign imports. While Ex-Im's
               economic impact memorandums often contained information on these
               trade measures in a separate section, the presence or absence of
               these measures is not generally identified as the basis for
               support of oversupply determinations. Furthermore, an indicator
               that has been important to Ex-Im's determinations, capacity
               utilization, is not listed among the indicators of oversupply in
               its procedures. Ex-Im's conclusions about oversupply are typically
               supported by information related to prices, capacity utilization,
               and direct measures or forecasts of global supply and demand.

    ^35As we have indicated in a previous section of this report, when the
    foreign-produced good is directly subject to a final antidumping or
    countervailing duty order or a final section 201 determination, Ex-Im
    eliminates it from consideration for financing through its screening
    process.

               Differences in criteria considered important for determining
               oversupply have been the basis for disagreements regarding whether
               Ex-Im should deny an application on economic impact grounds. An
               Ex-Im official stated that the lack of a definition for oversupply
               has been problematic because individuals may differ regarding
               whether a commodity is in oversupply, depending on the factors
               they consider. As a result of such disagreements, some
               transactions at Ex-Im have "stopped in their tracks," according to
               the Ex-Im official. This was illustrated in the case of a
               transaction that would have increased steel capacity in Saudi
               Arabia. Ex-Im and several agencies initially disagreed regarding
               oversupply on the steel project. Ex-Im's final economic impact
               assessment concluded that the transaction would likely have a net
               negative impact on the U.S. economy, and Ex-Im's board denied the
               transaction. An official with one of the agencies from which Ex-Im
               solicits comments also stated that oversupply has been an area of
               disagreement.

    			    Procedures Do Not Have Criteria for when to Use Proportionality

               Similarly, Ex-Im does not clearly define when the concept of
               "proportionality" would be used. An Ex-Im official noted that the
               bank included proportionality in its procedures after the 2002
               reauthorization to retain some flexibility in how it analyzed the
               applications.^36 A senior official stated that, in some cases, it
               is not reasonable for the bank to assume responsibility for all of
               a project's increased production when it only finances a portion
               of the overall project. Instead, the concept of proportionality
               allows the bank to measure the potential for its financing to
               displace the production of U.S. competitors in proportion to its
               funding. Applying proportionality would reduce the estimated costs
               to U.S. producers. For example, if Ex-Im financed $100 million
               worth of U.S. exports associated with a larger $2 billion project,
               the bank would be supplying 5 percent of the total project cost.
               If the $2 billion facility produced 10,000 metric tons of an
               exportable good, Ex-Im would assess the impact of its financial
               support on U.S. competitors on the basis of only 5 percent of the
               output--in proportion with its funding--or 500 metric tons.

    ^36We identified two instances where Ex-Im applied proportionality after
    the 2002 reauthorization.

               Using proportionality can change a net negative determination to a
               net positive determination. For example, Ex-Im applied the
               proportionality concept to the estimate of displaced production
               regarding a project that would allow a Chinese company to increase
               production of petrochemicals. According to documents provided by
               other government officials, Ex-Im's analysis of a petrochemical
               project noted approximately $170 million in expected benefits from
               the U.S. export sale, but approximately $750 million in potential
               indirect "lost opportunity" costs. Using standard calculations,
               the analysis would have yielded a net negative impact of over $580
               million. However, Ex-Im applied proportionality and found that its
               share of the project financing equaled only 4.5 percent of project
               costs--therefore, Ex-Im financing was associated with about $34
               million in potential indirect lost opportunity costs. This use of
               proportionality yielded a net positive impact of $134 million.^37
               Ex-Im approved the project in fiscal year 2003.

               Ex-Im also has not systematically used the proportionality concept
               or specified when it would be applicable. For example, in an
               application to finance an ethanol facility in Trinidad,^38 Ex-Im
               argued that the equipment they financed did not allow the company
               to produce ethanol, but rather to introduce a "simple refinement
               step"--that is, dehydration. At that time, the price of hydrous
               ethanol (the input) was 10 percent lower than anhydrous ethanol
               (the end product). Therefore, using the proportionality approach,
               Ex-Im asserted that its financing was only responsible for 10
               percent of the output. Using proportionality, Ex-Im concluded that
               the project would increase foreign production by 0.35 percent of
               U.S. production. Using standard calculations, foreign production
               would have increased by 3.5 percent of U.S. production. Ex-Im
               asserts that its decision to use proportionality when equipment
               refines a product rather than produces a new product is fair and
               reasonable. However, in a similar project involving the refinement
               of hot-rolled steel to galvanized steel, Ex-Im did not apply
               proportionality.

    ^37According to documentation we received from the reviewing government
    agencies, two agencies objected to the use of proportionality for this
    project; therefore, Ex-Im provided them an alternative analysis supporting
    a net positive impact without using proportionality. However, this
    alternate calculation was not included in Ex-Im's final memorandum to the
    board of directors.

    ^38This project was initially not screened for economic impact, given that
    the finance value was less than $10 million. Ex-Im conducted this analysis
    after authorizing the project as required pursuant to Title I, Division D,
    of Pub. L. No. 108-447, the Consolidated Appropriations Act, 2005.

               In addition, several reviewing agencies have expressed concerns
               about the use of proportionality when determining a project's
               economic impact. Without knowing the conditions under which Ex-Im
               would apply proportionality, interested parties do not have a
               sense of the viability of their proposed project.

               Ex-Im acknowledged that both the oversupply and proportionality
               language in the procedures is confusing. A senior Ex-Im official
               also noted that the bank struggles with determining when to use
               the proportionality concept. The bank also acknowledged that it
               should create more specific guidelines in their procedures for
               defining oversupply and proportionality. Specific criteria would
               make the process more transparent. However, Ex-Im has not altered
               the language in its most recent procedures.

    			  Public Comments Are Not Fully Included in Board Memorandums

               Ex-Im does not regularly include the full text of the public
               comments that they receive. Ex-Im's economic impact procedures
               require it to attach the full set of comments as an appendix to
               the economic impact memorandums. In some cases, staff members
               attached selected communications. There were seven cases that
               received public comments and went to the board for decision but
               only two included copies of all of the comments received.
               According to Ex-Im, the Policy Analysis Division does not append
               copies of all public comments received because they are sometimes
               too numerous. Instead, the policy division summarizes the main
               arguments and often includes a representative letter. An Ex-Im
               official noted that the division retains all public comments and
               would make them available to the directors if requested. However,
               Ex-Im does not note in its procedures what criteria it uses for
               deciding which comments not to include, nor does it note in the
               memorandums that the letters were available for perusal upon
               request. The 2006 reauthorization now requires Ex-Im to provide in
               writing the views of all people who submit comments.

               Incorporating New Practices Would Increase Process's Predictability

               We identified two practices that Ex-Im does not currently
               incorporate into their economic impact procedures that would
               increase the predictability of the process's outcomes--namely,
               referencing the sensitive sector list and publishing detailed
               analyses results. First, in its revised procedures, Ex-Im does not
               reference its list of industries unlikely to be financed for
               economic impact reasons. In the 2006 reauthorization legislation,
               Congress required Ex-Im to create a "sensitive sectors list"
               denoting sectors that are unlikely to receive Ex-Im financing.
               Ex-Im has created this list and makes it publicly available on its
               Web site. However, Ex-Im's updated procedures do not specify the
               list's implications and indicate that requests for financing
               projects in sectors on the list will receive close scrutiny during
               the economic impact process. In contrast, the procedures do list
               "undersupplied" sectors (oil and gas and diamonds) that will not
               be denied on economic impact grounds. A direct reference to the
               sensitive sectors list would enable interested parties to quickly
               identify whether their projects were viable. Second, Ex-Im does
               not currently publicize the results of its detailed economic
               impact analyses. Ex-Im publicly announces when it begins a
               detailed analysis. It also posts minutes of board meetings on its
               Web site that announce ultimate financing decisions. However, the
               financing decisions do not include statements regarding whether
               the project was subject to an economic impact analysis, or the
               determination regarding whether there would be a net negative or
               net positive impact on the economy. Publicizing such information
               would provide interested parties with a record of what types of
               projects passed the detailed analysis.

    			  Conclusions

               While many requests for Ex-Im's financing do not require economic
               impact analysis, the bank often faces the difficult task of
               balancing the interests of different industries while working to
               achieve its broad mission to promote U.S. exports and increase
               U.S. jobs. Ex-Im's board of directors must consider the economic
               impact of proposed projects while also weighing other factors,
               such as creditworthiness, environmental impact, and small business
               participation. Congress has given Ex-Im's board wide discretion in
               how it implements the economic impact requirements specified in
               the bank's charter. It directs Ex-Im to examine certain factors,
               such as whether products are in surplus on global markets (or in
               "oversupply," according to Ex-Im), but gives the board the
               authority to approve applications that it believes will have an
               overall benefit on U.S. production and employment, despite some
               negative impacts. Determining the various economic impact aspects
               that weigh into the board's decision can be challenging, requiring
               Ex-Im to identify what international markets are likely to be
               involved and to quantify how economic trends may play out in the
               future. While Ex-Im's board of directors may sometimes have to
               consider economic impact in the face of imperfect information, it
               needs to be able to rely on a process that involves sound
               methodology and consistent application of procedures, and to
               understand key assumptions and areas of uncertainty. Moreover,
               Ex-Im clients and affected U.S. industries need a process that is
               transparent and, where possible, predictable.

               Although Ex-Im generally follows its broad economic impact
               procedures, we identified several areas for improvement related to
               the screening of applications for economic impact, the analysis
               methodology, and the transparency of the overall process. First,
               while Ex-Im has the discretion to use screens to identify
               applications for further review and to allocate its staff
               resources effectively, the effectiveness of Ex-Im's $10 million
               screen is uncertain because Ex-Im has not conducted an analysis to
               determine the extent to which it identifies projects that could
               meet the statutory definition of substantial injury. Next, we
               identified limitations in certain assumptions Ex-Im makes to
               estimate economic impact in its detailed analyses. In some cases,
               these limitations had not been adequately disclosed nor had the
               sensitivity of economic impact conclusions to these assumptions
               been explored. In addition, while Ex-Im makes the economic impact
               procedures publicly available, the procedures do not provide
               adequate transparency and predictability. This has been noted by
               exporters, industry, and U.S. government agency officials. Ex-Im's
               own competitiveness survey cites one respondent as saying that the
               unpredictability of the economic impact process hurts U.S.
               sourcing in projects.

               Congress demonstrated in Ex-Im's 2006 reauthorization its
               continuing interest in Ex-Im having a sound and transparent
               economic impact process, and addressed certain transparency
               concerns. We believe that several improvements in Ex-Im's process
               are still needed to ensure that its decisions stand up to the
               inevitable scrutiny of interested and affected parties.

    			  Recommendations

               To improve Ex-Im's identification and analysis of applications for
               economic impact, we recommend that the Chairman of the
               Export-Import Bank of the United States take the following three
               steps:

               o Review the $10 million threshold to determine whether additional
               steps are needed to mitigate the risk of exempting from more
               detailed review applications that could meet the definition of
               substantial injury. The additional steps could include, for
               example, selectively reviewing transactions that would affect
               relatively small U.S. industries or sensitive sectors.
               o Create specific methodological guidelines for staff analyzing
               applications for economic impact, bearing in mind relevant OMB
               guidance where appropriate.
               o Review and strengthen internal controls concerning the economic
               impact analysis to ensure, for example, that staff members
               conducting the analyses have sufficient training and guidance in
               Ex-Im's economic impact methodology, that relevant Ex-Im staff
               verify and approve the analyses, and that sufficient documentation
               is maintained to record key information.

               To improve the public transparency of the economic impact process
               for interested and affected parties, we also recommend that the
               Chairman of the Export-Import Bank of the United States take the
               following three steps:

               o Clarify publicly available procedures by including more
               information regarding Ex-Im's methodology for analyzing
               applications, such as defining how it incorporates "oversupply"
               determinations in its analysis and what measures it uses and
               specifying under what conditions "proportionality" would be used.
               o Inform interested parties about the sensitive sector list by
               including a reference to the list in the economic impact
               procedures.
               o Publish either individually, or in the publicly available board
               minutes, the final determinations regarding whether a project
               would have a positive or negative impact.

    			  Agency Comments and Our Evaluation

               We provided a draft of this report to the Export-Import Bank of
               the United States. Ex-Im generally concurred with our
               recommendations and stated that it will continue to explore
               feasible ways to improve the economic impact procedures and make
               the process more consistent and user-friendly. Ex-Im stated that
               it will (1) review the $10 million threshold to ensure that it
               satisfies its intended function; (2) enhance existing quality
               assurance measures by attempting to standardize staff training and
               to expand document maintenance; and (3) clarify the basis for an
               assessment of "oversupply," and create criteria for using
               "proportionality." In addition, Ex-Im agreed to seek to
               incorporate our suggestions as it refines its analytic
               methodology, but the bank noted that a single approach would not
               address the diversity of transactions it considers. We acknowledge
               that a single approach is not necessarily appropriate for all
               analyses, but we believe that a consistent set of methodological
               principles, such as those embodied in OMB guidance, would
               nevertheless enhance the economic impact analysis process. Lastly,
               Ex-Im agreed that increased transparency and predictability will
               improve the economic impact process and notes that it has amended
               its economic impact procedures to reflect increased transparency
               requirements laid out in the Export-Import Bank Reauthorization
               Act of 2006. We believe that the process's transparency and
               predictability can be further improved by several practices, such
               as referring to the sensitive sector list in the procedures and
               publishing the bank's determination regarding whether a project
               will have a positive or negative net impact. Ex-Im also provided
               technical comments, which we have incorporated where appropriate.
               Ex-Im's official comments are reprinted in appendix III.

               As agreed with your offices, unless you publicly announce the
               contents of this report, we plan no further distribution until 30
               days from the report date. At that time, we will send copies of
               this report to other interested congressional committees. We also
               will provide copies of this report to the Chairman of the
               Export-Import Bank of the United States. In addition, this report
               will be available at no charge on the GAO Web site at
               [44]http://www.gao.gov .

               If you or your staff members have any questions about this report,
               please contact me at (202) 512-4347 or [45]YagerL@gao.gov .
               Contact points for our Offices of Congressional Relations and
               Public Affairs may be found on the last page of this report. Other
               GAO contacts and staff acknowledgments are listed in appendix IV.

               Loren Yager
    			  Director, International Affairs and Trade

    			  Appendix I: Objectives, Scope, and Methodology

               The Ranking Member of the Senate Committee on Finance and a member
               of the Senate Committee on Banking, Housing, and Urban Affairs
               requested that we review the Export-Import Bank of the United
               States' (Ex-Im) economic impact analysis process. In this report,
               we reviewed (1) Ex-Im's overall policies and procedures for
               determining economic impact; (2) the extent to which Ex-Im's
               procedures provide for the identification and appropriate analysis
               of applications that could potentially cause adverse economic
               impact; and (3) the extent to which its policies, procedures, and
               decisions are transparent to interested and affected parties.

               We reviewed the 17 economic impact memorandums that Ex-Im
               finalized between fiscal years 2002 and 2006. We chose this time
               frame because all analyses were conducted using the same
               procedures, and were adapted after the 2002 reauthorization but
               before the 2006 reauthorization. Of those cases, we chose 5 to
               review in greater depth: Russia/polystyrene, Egypt/ammonia,
               Singapore/semiconductors, Turkey/denim, and Saudi Arabia/direct
               reduced iron. We selected case studies that would provide a broad
               representation of elements in the following categories:

               o Country.
               o Type of industry/commodity.
               o Finance amount.
               o Final board decision.
               o Staff members conducting analyses.
               o Methodological issues.^1

               Given the small universe (17) of detailed economic impact analyses
               conducted by Ex-Im from fiscal years 2002 through 2006, we
               determined that selecting a random sample would not be necessary
               or appropriate. While we used these 5 case studies to guide some
               of our work, we reviewed all 17 detailed analyses because findings
               that are based solely on a judgmental sample would not necessarily
               be generalizable to all detailed economic impact analyses
               conducted.

    ^1Methodological issues include determining "oversupply," estimating
    displaced production or the impact on the trade balance, and case-specific
    issues as noted in appendix II.

               To describe Ex-Im's legal interpretation of its statutory economic
               impact analysis mandate, we reviewed the statutory provision as it
               was written in the bank's 2002 reauthorizing legislation; reviewed
               other relevant legal documents; and interviewed Ex-Im legal staff,
               including the General Counsel, regarding their interpretation. To
               describe Ex-Im's economic impact analysis process, we reviewed
               Ex-Im's economic impact analyses procedures published in March
               2003 and compared them with the 2002 reauthorization legislation
               for consistency. To describe how Ex-Im's 2006 reauthorization will
               impact the economic impact procedures, we reviewed the relevant
               legislation and the revised economic impact procedures, and spoke
               with cognizant Ex-Im officials. To describe how Ex-Im implements
               the economic impact procedures, we spoke with the analysts who
               analyzed our 5 case studies, the engineers who assisted with the
               analysis, and the supervising officials.

               To determine how many applications Ex-Im coded for economic
               impact, we reviewed data on all projects processed between fiscal
               years 2003 and 2005. Ex-Im did not use the same set of economic
               impact procedures when reviewing applications in fiscal year 2002;
               therefore, we did not use data from that fiscal year. In addition,
               Ex-Im did not have complete data for fiscal year 2006 projects at
               the time of our review. These data have some limitations that
               could result in small deviations from the values and quantities
               that we reported. Despite limitations, we determined that the
               transaction data provided by Ex-Im were sufficiently reliable for
               our purposes.

               To determine whether the exportable goods in each of our five case
               studies were subject to antidumping orders and countervailing duty
               orders, we reviewed the United States International Trade
               Commission's (ITC) list of current antidumping and countervailing
               duty orders in place as of October 23, 2006, and February 15,
               2007; the Federal Register from 1997 to the present for notices
               posted by ITC or the Department of Commerce's International Trade
               Administration (ITA); and ITA's AD/CVD Investigations Federal
               Register History. To determine whether the exportable goods in our
               five case studies were subject to "safeguards," we searched the
               Federal Register from 1997 up to the date of the case for notices
               posted by ITC or ITA that mentioned the name of the product
               involved in our cases.

               To assess the extent to which Ex-Im's procedures provide for the
               identification and appropriate analysis of requests to finance
               projects that could potentially cause adverse economic impact, we
               reviewed the economic impact provisions of Ex-Im's charter and the
               procedures implementing those provisions. To determine the
               effectiveness of the $10 million threshold, we attempted to
               judgmentally sample 10 applications that requested financing for
               capital good exports between $5 and $10 million. However, our
               ability to do so was limited because Ex-Im could provide the
               relevant information for only 2 of the 10 projects. We reviewed 17
               detailed economic impact analyses and documentation related to
               some applications that had not received a detailed analysis, and
               conducted interviews with Ex-Im officials on the 5 analyses that
               we chose as case studies. We also reviewed the case studies within
               a panel of Ph.D. economists in GAO. In addition, we interviewed
               officials from agencies that conduct similar analyses at the ITC
               and the Overseas Private Investment Corporation, and reviewed
               cost-benefit analysis guidance from the Office of Management and
               Budget. We also reviewed relevant reports from GAO, the
               Congressional Budget Office, and the Congressional Research
               Service.

               To assess the economic impact analysis process's transparency, we
               reviewed the Federal Register to confirm that Ex-Im posted public
               notices for all detailed analyses it began. We reviewed Ex-Im's
               Web site to establish what information Ex-Im made public
               (including current procedures and final transaction decisions). We
               also reviewed internal Ex-Im documents. We interviewed agency
               officials from the Departments of Commerce, State, and the
               Treasury and from the Office of the U.S. Trade Representative who
               formally review the economic impact memorandums. We compared draft
               analyses that the agencies received from Ex-Im with final analyses
               and reviewed communications between the agencies and Ex-Im. We
               also interviewed representatives from companies whose exports
               relied on Ex-Im financing, and representatives from organizations
               that expressed concern over the projects' potential impact on the
               industries they represent. We used our 5 cases to determine which
               agency officials, exporters, and industry officials to interview.

               We conducted our work from October 2006 through August 2007 in
               accordance with generally accepted government auditing standards.

    			  Appendix II: List of Detailed Economic Impact Analyses That Ex-Im
    			  Began between Fiscal Years 2002 and 2006

               We requested and received copies of all detailed economic impact
               analyses Ex-Im conducted in fiscal years 2002 through 2006. We
               also requested data on all transactions processed during the same
               fiscal years. However, Ex-Im only had complete and reliable data
               for fiscal years 2003 though 2005. Transactions processed in
               fiscal years 2002 were governed by a different charter than the
               other fiscal years, and data for transactions processed in 2006
               were not available at the time of our review. Thus, the number of
               detailed analyses presented in this appendix does not correspond
               exactly with numbers cited in the report text.

    Table 1: Detailed Economic Impact Analyses and Board of Directors'
    Financing Decisions

    Dollars in millions
                                                                   Final action
                                         Net           Final
                                    contract           board               Fiscal
          Country    Commodity         price  Finding  decision   Date     year^a
    1  Japan      Titanium          $16.3  Net      Approved   08/22/06 2006
                     (electron beam           positive
                     furnace)
    2  Saudi      Direct Reduced     74.3  Net      Denied     03/09/06 2006
          Arabia     Iron Facility            negative
    3  Turkey     Denim              21.5  Net      Approved   09/08/05 2005
                     (equipment)              positive
    4  Qatar      Petrochemicals    235.0  Net      Approved   07/14/05 2005
                     (equipment and           positive
                     services)
    5  Egypt      Ammonia           186.9  Net      Approved   02/03/05 2005
                                              positive
    6  Israel     Polypropylene      35.4  Net      Approved   02/03/05 2005
                                              positive
    7  Russia     Polystyrene        17.3  Net      Approved   12/22/04 2005
                     (production              positive
                     equipment)
    8  Singapore  Semiconductors    757.5  Net      Approved   11/12/04 2005
                                              positive
    9  Ukraine    Galvanizing        18.5  Net      Effective  05/24/04 2004
                     line (steel)             positive denial
                                                       (split
                                                       vote)
    10 Argentina  Gold and           72.4  Net      Approved   03/26/04 2004
                     silver                   positive
    11 India      Pure               83.6  Net      Approved   06/05/03 2003
                     Terephthalic             positive
                     Acid
    12 Russia     Mettallurgical     25.0  Net      Approved   04/03/03 2003
                     coal                     positive
    13 Uzbekistan Gold mine          78.0  Net      Approved   01/30/03 2003
                                              positive
    14 China      Petrochemical     200.0  Net      Approved   10/25/02 2003
                     production               positive

    Source: GAO analysis of Ex-Im data.

    aThe U.S. government fiscal year runs from October 1st through September
    30th. The fiscal year is named by the calendar year in which it ends.

    Table 2: Detailed Economic Impact Analyses, with No Final Board of
    Directors' Decision Because of Transaction Withdrawal

    Dollars in millions
                                                                   Final action
                                                 No final board            Fiscal
         Country  Commodity     Amount  Finding  decision made    Date     year
    1 Portugal Photovoltaics  $14.9  Net      Withdrawn        03/20/06 2006
                  modules               positive
    2 Greece   Photovoltaics   38.0  Net      Withdrawn        08/03/05 2005
                  modules               positive
    3 Mexico   Flat glass      24.0  Net      Withdrawn        11/02/04 2005
                                        positive

    Source: GAO analysis of Ex-Im data.

    Table 3: Detailed Economic Impact Analysis Conducted Postauthorization at
    the Request of the Credit Committee

    Dollars in millions
                                                                   Final action
                                                 Final board               Fiscal
         Country Commodity      Amount  Finding  decision         Date     year
    1 Russia  Mettallurgical   $9.8  Net      Approved         09/21/04 2004
                 coal                   positive

    Source: GAO analysis of Ex-Im data.

    Table 4: Detailed Economic Impact Analysis Conducted Postauthorization
    Pursuant to the Consolidated Appropriations Act of 2004

    Dollars in millions
                                                                   Final action
                                                        Final
                                                        board              Fiscal
         Country    Commodity Amount  Finding           decision  Date     year
    1 Trinidad   Ethanol     $9.9  No definitive     Approved  03/26/04 2004
         and Tobago                   finding^a

    Source: GAO analysis of Ex-Im data.

    Note: Title I, Division D, of Pub. L. No. 108-447.

    aIn its analysis, Ex-Im concluded the following: "whether Ex-Im Bank
    support for this project will be associated with a positive or negative
    impact on the U.S. balance of trade largely depends on the outcome of the
    pending proposal to limit duty-free CBI ethanol imports to 90-million
    gallons per year. If the `7% cap' remains in place, then it is likely that
    Ex-Im support will be associated with a net negative trade flow. If the
    pending `90-million gallon cap' gets enacted, then it is likely that Ex-Im
    support will be associated with a net positive trade flow."

    Table 5: Unfinished Detailed Economic Impact Analyses

    Dollars in millions
                                                               Federal Register
                                                                   posting
         Country      Commodity                      Amount  Date     Fiscal year
    1 Saudi Arabia Petrochemicals (equipment and  $480.0  07/25/06 2006
                      services)
    2 Kenya        Soda ash (locomotives for        14.0  02/09/06 2006
                      transport)
    3 China        Semiconductors                1,200.0  12/23/04 2005
                                                      500.0  08/05/04 2004
    4 Turkey       Soda ash production              50.0  07/19/04 2004
    5 Mexico       Aluminum engine blocks           14.0  05/23/02 2002
    6 Mexico       Automotive crankshaft            35.0  03/04/02 2002
                      (equipment)
    7 South Africa Phosphate fertilizers            12.5  03/04/02 2002

    Source: GAO analysis of Ex-Im data and Federal Register notices.

    Note: Ex-Im posts Federal Register announcements when it begins detailed
    economic impact analyses. Ex-Im made no final financing decisions on these
    transactions.

    Appendix III: Comments from the Export-Import Bank of the United States

    Appendix IV: GAO Contact and Staff Acknowledgments

    Contact

    Loren Yager, (202) 512-4347 or [46]YagerL@gao.gov

    Staff Acknowledgments

    In addition to the person named above, the following people made key
    contributions to this report: Celia Thomas, Assistant Director; Miriam A.
    Carroll; Michael Hoffman; and Amber Simco. The following people provided
    technical assistance: Karen Deans, David Dornisch, Etana Finkler, Ernie
    Jackson, and Mark Speight.

    (320454)

    GAO's Mission

    The Government Accountability Office, the audit, evaluation and
    investigative arm of Congress, exists to support Congress in meeting its
    constitutional responsibilities and to help improve the performance and
    accountability of the federal government for the American people. GAO
    examines the use of public funds; evaluates federal programs and policies;
    and provides analyses, recommendations, and other assistance to help
    Congress make informed oversight, policy, and funding decisions. GAO's
    commitment to good government is reflected in its core values of
    accountability, integrity, and reliability.

    Obtaining Copies of GAO Reports and Testimony

    The fastest and easiest way to obtain copies of GAO documents at no cost
    is through GAO's Web site ( [47]www.gao.gov ). Each weekday, GAO posts
    newly released reports, testimony, and correspondence on its Web site. To
    have GAO e-mail you a list of newly posted products every afternoon, go to
    [48]www.gao.gov and select "Subscribe to Updates."

    Order by Mail or Phone

    The first copy of each printed report is free. Additional copies are $2
    each. A check or money order should be made out to the Superintendent of
    Documents. GAO also accepts VISA and Mastercard. Orders for 100 or more
    copies mailed to a single address are discounted 25 percent. Orders should
    be sent to:

    U.S. Government Accountability Office 441 G Street NW, Room LM Washington,
    D.C. 20548

    To order by Phone: Voice: (202) 512-6000
    TDD: (202) 512-2537
    Fax: (202) 512-6061

    To Report Fraud, Waste, and Abuse in Federal Programs

    Contact:

    Web site: [49]www.gao.gov/fraudnet/fraudnet.htm
    E-mail: [50]fraudnet@gao.gov
    Automated answering system: (800) 424-5454 or (202) 512-7470

    Congressional Relations

    Gloria Jarmon, Managing Director, [51]JarmonG@gao.gov (202) 512-4400 U.S.
    Government Accountability Office, 441 G Street NW, Room 7125 Washington,
    D.C. 20548

    Public Affairs

    Susan Becker, Acting Manager, [52]Beckers@gao.gov (202) 512-4800 U.S.
    Government Accountability Office, 441 G Street NW, Room 7149 Washington,
    D.C. 20548

    [53]transparent illustrator graphic

    [54]www.gao.gov/cgi-bin/getrpt?GAO-07-1071 .

    To view the full product, including the scope
    and methodology, click on the link above.

    For more information, contact Loren Yager, 202-512-4347, YagerL@gao.gov.

    Highlights of [55]GAO-07-1071 , a report to congressional requesters

    September 2007

    EXPORT-IMPORT BANK

    Improvements Needed in Assessment of Economic Impact

    Congress established the Export-Import Bank of the United States (Ex-Im)
    to encourage U.S. exports. Congress has directed Ex-Im to consider the
    economic impact of its work and not to fund activities that will adversely
    affect U.S. industry. In this context, GAO reviewed (1) Ex-Im's policies
    and procedures for determining economic impact, (2) the extent to which
    Ex-Im appropriately identifies and analyzes projects that could cause
    adverse economic impact, and (3) the extent to which Ex-Im's process is
    transparent. To conduct this work, GAO reviewed Ex-Im's procedures, data
    on projects applicable for the economic impact process, and detailed
    economic impact analyses. GAO also interviewed Ex-Im and reviewing agency
    officials and industry representatives.

    [56]What GAO Recommends

    To improve the identification and analysis of applications for economic
    impact, GAO recommends that Ex-Im review the $10 million threshold, create
    better methodological guidelines, and strengthen its internal controls. To
    improve transparency, GAO recommends that Ex-Im clarify its procedures for
    conducting economic impact analyses. Ex-Im generally concurred with GAO's
    recommendations and stated that it will explore feasible ways to improve
    the economic impact process and make it more consistent and user-friendly.

    Congress requires Ex-Im to assess whether a project requesting its
    financial support will negatively impact U.S. industry. Ex-Im uses a
    screening process to identify projects with the most potential to have an
    adverse economic impact, and then subjects the identified projects to
    detailed analysis. A negative finding could result in a denial of Ex-Im
    support. The screens--either explicitly required by Ex-Im's charter or
    introduced under the bank's statutory authority--include whether (1) the
    financed project will increase foreign production, (2) there are trade
    measures against the resulting product, (3) the resulting product is
    "undersupplied," (4) the requested financing is over $10 million, and (5)
    the financed project will increase foreign production by 1 percent or more
    of U.S. production. Between fiscal years 2003 and 2005, this screening
    process identified 20 projects (out of 771 applicable) that required a
    detailed economic impact analysis. In the detailed analysis, Ex-Im
    assesses whether the resulting product would be in surplus on world
    markets or in competition with U.S. production. Between fiscal years 2003
    and 2005, Ex-Im approved most projects applicable for economic impact
    analysis, totaling approximately $6.1 billion in approved financing.

    GAO found challenges and areas for improvement in the screening and
    detailed analysis of projects for economic impact. The effectiveness of
    the $10 million screen, introduced under Ex-Im's statutory authority, is
    uncertain. Ex-Im has not determined whether it removes from review those
    projects that could meet the statutory definition of substantial injury
    (producing 1 percent or more of U.S. production in an industry). For
    example, a $9.9 million financing request that would allow a foreign
    company to produce an estimated 3.5 percent of U.S. production was
    screened out of the analysis. GAO also found that Ex-Im could improve some
    methods it uses in its detailed analyses, such as how it estimates
    displaced production. In addition, GAO found that Ex-Im could clarify how
    it characterizes the effect of its financing on the U.S. trade balance.
    Finally, GAO found that Ex-Im could strengthen the internal controls it
    uses to ensure that the screening process and detailed analysis are
    conducted consistently and accurately.

    GAO also found limitations in the transparency of Ex-Im's economic impact
    process. While Ex-Im publicly posts its procedures, they contain areas of
    ambiguity. For example, the procedures do not define the term
    "oversupply." Also, Ex-Im has not provided all public comments to the
    board of directors. GAO identified two practices--referencing in the
    procedures the list of sectors likely to require extra scrutiny and
    publicizing final economic impact conclusions--that would increase the
    predictability of the process.

    References

    Visible links
      43. http://www.exim.gov/
      44. http://www.gao.gov/
      45. mailto:YagerL@gao.gov
      46. mailto:YagerL@gao.gov
      47. http://www.gao.gov/
      48. http://www.gao.gov/
      49. http://www.gao.gov/fraudnet/fraudnet.htm
      50. mailto:fraudnet@gao.gov
      51. mailto:JarmonG@gao.gov
      52. mailto:Beckers@gao.gov
      54. http://www.gao.gov/cgi-bin/getrpt?GAO-07-1071
      55. http://www.gao.gov/cgi-bin/getrpt?GAO-07-1071
    *** End of document. ***