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					 

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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

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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][email protected] .
           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][email protected]

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)

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[53]transparent illustrator graphic

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

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For more information, contact Loren Yager, 202-512-4347, [email protected].

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:[email protected]
  46. mailto:[email protected]
  47. http://www.gao.gov/
  48. http://www.gao.gov/
  49. http://www.gao.gov/fraudnet/fraudnet.htm
  50. mailto:[email protected]
  51. mailto:[email protected]
  52. mailto:[email protected]
  54. http://www.gao.gov/cgi-bin/getrpt?GAO-07-1071
  55. http://www.gao.gov/cgi-bin/getrpt?GAO-07-1071
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