Export-Import Bank: Options for Achieving Possible Budget Reductions
(Letter Report, 12/20/96, GAO/NSIAD-97-7).

Pursuant to a congressional request, GAO reviewed: (1) how the
Export-Import Bank of the United States (Eximbank) spends its program
appropriation; (2) program options that the Eximbank may want to
consider to reduce the cost of its export financing programs; (3)
potential implications of these options; and (4) the nature and extent
of Eximbank's involvement in a type of financing known as project
financing.

GAO found that: (1) in each of the last 5 fiscal years (FY) 1992 through
1996, the Eximbank has used an average of $750 million of its credit
subsidy appropriation to support an average of $13.3 billion in export
loans, loan guarantees, and insurance; (2) the appropriations have
facilitated exports to areas with important U.S. commercial and
strategic interests; (3) high risk markets constituted a relatively
small share, 13 percent, of the Eximbank's total financing commitments,
yet absorbed a relatively large share, 44 percent, of its subsidy costs
in FY 1995; (4) two broad options that would allow the Eximbank to
reduce subsidies while remaining competitive with foreign export credit
agencies (ECA) include raising fees for services and reducing risks of
its programs by, for example, capping the maximum allowable subsidies
offered, limiting program availability in certain high-risk markets, or
offering less than 100-percent risk protection; (5) Eximbank officials
said any proposed fee increases need to be considered within the broader
context of current international efforts to gradually reduce government
export finance subsidies, and that these options could make Eximbank
programs less competitive relative to other ECAs, but acknowledged that
it would be difficult to determine the precise trade effects of these
options; (6) Eximbank officials also noted that these program options
would undermine U.S. government efforts to provide support in some
higher-risk markets, such as the newly independent states of the former
Soviet Union, which they said hold promising long-term trade potential;
and (7) in FY 1993, the Eximbank supported $150 million in project
finance transactions, $2.1 billion in FY 1995, and $1.6 billion in FY
1996.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  NSIAD-97-7
     TITLE:  Export-Import Bank: Options for Achieving Possible Budget 
             Reductions
      DATE:  12/20/96
   SUBJECT:  Off-budget federal entities
             Exporting
             Foreign loans
             Credit
             Appropriated funds
             Subsidies
             International economic relations
             International cooperation
             Foreign trade policies
             Cost control
IDENTIFIER:  OMB Interagency Country Risk Assessment System
             European Union
             China
             Mexico
             Russia
             
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Cover
================================================================ COVER


Report to the Chairman, Subcommittee on International Finance,
Committee on Banking, Housing, and Urban Affairs, U.S.  Senate

December 1996

EXPORT-IMPORT BANK - OPTIONS FOR
ACHIEVING POSSIBLE BUDGET
REDUCTIONS

GAO/NSIAD-97-7

Export-Import Bank

(711172)


Abbreviations
=============================================================== ABBREV

  ECA - export credit agency
  EU - European Union
  Eximbank - Export-Import Bank
  ICRAS - Interagency Country Risk Assessment System
  NIS - newly independent states
  OECD - Organization for Economic Cooperation and Development
  OMB - Office of Management and Budget
  OPIC - Overseas Private Investment Corportation

Letter
=============================================================== LETTER


B-274938

December 20, 1996

The Honorable Christopher S.  Bond
Chairman, Subcommittee on International Finance
Committee on Banking, Housing, and Urban Affairs
United States Senate

Dear Mr.  Chairman: 

The Export-Import Bank of the United States (Eximbank), an
independent U.S.  government agency responsible for assisting U.S. 
exporters, has been the subject of considerable debate in recent
years.  On the one hand, some believe that it plays an important role
by providing financing aimed at correcting market failures and
helping U.S.  exporters level the playing field against their foreign
counterparts.  On the other hand, some believe that the Eximbank's
programs distort markets by providing unwarranted taxpayer subsidies
to U.S.  exporters. 

As you requested, this report (1) describes how the Eximbank spends
its program appropriation, (2) identifies program options that the
Eximbank may want to consider to reduce the cost of its export
financing programs, (3) discusses the potential implications of these
options, and (4) discusses the nature and extent of the Eximbank's
involvement in a type of financing known as "project financing."\1

Project financing poses different types of risk than sovereign
lending but also presents new opportunities for mitigating these
risks and better leveraging of Eximbank resources. 


--------------------
\1 Project financing responds to developing countries' increasing
needs for sources of private capital to finance major capital
projects.  It involves financing for major capital projects where the
credit judgment on the likelihood of repayment is based on the
project's anticipated future revenues rather than sovereign
(government) guarantees. 


   BACKGROUND
------------------------------------------------------------ Letter :1

In 1934, the Eximbank was created to facilitate exports of U.S. 
goods and services by offering a wide range of financing at terms
competitive with those of other governments' export financing
agencies.  Such financing includes (1) loans to foreign buyers of
U.S.  exports; (2) loan guarantees to commercial lenders, providing
repayment protection for loans to foreign buyers of U.S.  exports;
(3) working capital guarantees for pre-export production; and (4)
export credit insurance to exporters and lenders, protecting them
against the failure of foreign buyers to pay their credit
obligations.  The Eximbank is to absorb credit risks that the private
sector is unwilling or unable to assume. 

Over the last 5 fiscal years, Eximbank financing commitments
increased from $12.3 billion in 1992 to a high of $15.1 billion in
1993 and then declined to $11.5 billion in 1996.  Because of the
continued expansion of U.S.  exports from $448 billion in 1992 to
$706 billion in 1995, the proportion of U.S.  exports supported by
the Eximbank declined from 2.8 percent in 1992 to 1.7 percent in
1995. 

Although it is given broad discretion in implementing its programs,
the Eximbank must comply with several statutory requirements.  Among
other things, the Eximbank is required to

  -- provide loans, loan guarantees, and export credit insurance at
     rates and on terms that are "fully competitive" with those of
     other foreign government-supported export credit agencies
     (12 U.S.C.  sec.  635 (b)(1)(A),(B));

  -- provide loans only in circumstances in which there is a
     reasonable assurance of repayment (12 U.S.C.  sec.  635
     (b)(1)(B));

  -- seek to reach international agreements to reduce
     government-subsidized export financing (12 U.S.C.  sec. 
     635(b)(1)(A));\2 and

  -- supplement and encourage, but not compete with, private sources
     of capital (12 U.S.C.  sec.  635 (b)(1)(B)). 

The Eximbank operates under a renewable congressional charter that
expires on September 30, 1997.  The Eximbank's activities and
policies are overseen by its board of directors.  The board, or
appropriate designees, is responsible for approving support for
individual transactions and making determinations of reasonable
assurance of repayment.\3

Prior to 1992, the budget did not measure the true costs of federal
credit programs at the time of commitment.  The Federal Credit Reform
Act of 1990 (P.  L.  101-508, Nov.  5, 1990) aimed to improve the
budgeting of federal credit programs and requires government
agencies, including the Eximbank, starting in fiscal year 1992, to
estimate and budget for the total long-term costs of their credit
programs on a net present value basis.\4 Congress funds the
Eximbank's estimated credit subsidy costs (hereafter referred to as
"subsidy costs") through the annual appropriations process.  Subsidy
costs arise when the estimated program disbursements by the
government exceed the estimated payments to the government, on a net
present value basis.  Administrative expenses receive separate
appropriations and are reported separately in the budget.  The act
changed the budget treatment of credit programs so that their costs
can be compared more accurately with each other and with the costs of
other federal spending.  (See app.  I.)

Executive branch agencies are required to calculate the subsidy costs
of foreign loans and guarantees using annually updated ratings and
risk premiums provided through the Office of Management and Budget's
(OMB) Interagency Country Risk Assessment System (ICRAS).  Under this
approach, each sovereign borrower or guarantor is rated on an
11-category scale ranging from A through F- -, although the Eximbank
limits support to those rated in the top eight categories (A through
E-).  Generally speaking, A and B-rated markets are considered "low
risk"; C, C-, and D markets are considered "medium risk"; and D-, E,
and E- markets are considered "high risk."

In the future, many discretionary federal government programs,
including the Eximbank's programs, are projected to face increased
budgetary constraints.  The House Committee Report (104-600,
May 29, 1996) accompanying the 1997 Foreign Operations, Export
Financing, and Related Programs Appropriations Bill (H.R.  3540)
states that the Appropriations Committee will be "hard pressed" to
sustain appropriations for the Eximbank at current levels in future
years and urged the Eximbank to consult with the Committee on its
plans for overcoming the likely gap between demand and future federal
resources.\5 The OMB's fiscal year 1997 Analytical Perspectives also
projects a decline in Eximbank resources over the next 5 years from
$726 million in fiscal year 1997 to $587 million in fiscal year 2001. 


--------------------
\2 The United States and other developed countries use the
Organization for Economic Cooperation and Development (OECD) as the
chief forum for negotiating limitations on government export credit
subsidies and developing common guidelines for national export
financing assistance programs.  OECD is an international forum for
monitoring economic trends and coordinating economic policy among
29 countries, including the United States. 

\3 The Eximbank's board consists of five full-time members appointed
for 4-year terms by the President of the United States with the
advice and consent of the U.S.  Senate.  In addition, the Secretary
of Commerce and the U.S.  Trade Representative serve as ex officio,
nonvoting members. 

\4 Present value analysis calculates the value today of a future
stream of income or expenses. 

\5 The annual Foreign Operations appropriations bill is the primary
legislative vehicle through which Congress reviews and votes on the
foreign assistance and export financing budget. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :2

In each of the last 5 fiscal years (1992-96), the Eximbank has used
an average of $750 million of its credit subsidy appropriation to
support an average of $13.3 billion in export financing commitments
(loans, loan guarantees, and insurance).  These appropriations have
facilitated exports to areas with important U.S.  commercial and
strategic interests such as China, Mexico, and Russia.  High risk
(D-, E, and E-) markets constituted a relatively small share (13
percent) of the Eximbank's total financing commitments yet absorbed a
relatively large share (44 percent) of its subsidy costs in fiscal
year 1995. 

We identified two broad options that would allow the Eximbank to
reduce subsidies while remaining competitive with foreign export
credit agencies (ECA):  (1) raising fees for services and (2)
reducing the risks of its programs (for example, capping the maximum
allowable subsidies offered, limiting program availability in certain
high-risk markets, or offering less than 100-percent risk
protection).  The Eximbank's fees are currently lower than those
charged by most other ECAs because the Eximbank has interpreted its
broad congressional mandate to be "fully competitive" by setting its
fees to be as low or lower than about 75 percent of those offered by
other major ECAs.  Similarly, the Eximbank interprets its
congressional mandate to supplement, and not compete with, private
capital by providing financing in a wide variety of markets,
including more markets in the higher-risk (E-) categories than any of
its major competitors.\6

Both of these options could result in significant reductions in
subsidy costs and would allow the Eximbank to continue to operate
with reduced federal funding.  To illustrate the potential savings
associated with fee increases, we estimated that the Eximbank could
have saved about $63 million in fiscal year 1995 if it had raised its
fees to a level where they were as low as or lower than 55-60 percent
(rather than about 75 percent) of the fees charged by other major
ECAs in the same importing country markets.\7 The second set of
options involving reductions in program risks could also have
resulted in somewhat larger subsidy savings in the same year--up to
$157 million with only a slight effect on the overall level of U.S. 
exports supported with Eximbank financing.  However, the specific
level of subsidy savings resulting from these program options would
be dependent on several factors, including the willingness of
exporters and participating banks to absorb increased costs and
risks, and the reaction of competitor ECAs. 

The options we identified have several trade and foreign policy
implications that decisionmakers would need to address before making
any changes in the Eximbank's programs.  Eximbank officials said any
proposed fee increases need to be considered within the broader
context of current international efforts to gradually reduce
government export finance subsidies.  They also stated that these
options could make Eximbank programs less competitive relative to
other ECAs but acknowledged that it would be difficult to determine
the precise trade effects of such actions.  These officials also
noted that these options would undermine U.S.  government efforts to
provide support in some higher-risk markets, such as the newly
independent states (NIS) of the former Soviet Union, which they said
hold promising long-term trade potential. 

The project finance program was created to help U.S.  exporters and
project lenders compete for contracts for large capital projects in
various developing countries.  The program has expanded over the past
few years and has accounted for an increasing proportion of Eximbank
transactions.  In fiscal year 1993, the Eximbank supported $150
million in project finance transactions, $2.1 billion in fiscal year
1995, and $1.6 billion in fiscal year 1996.  For fiscal year 1996,
project finance deals constituted about 3 percent of the Eximbank's
total subsidy costs.  Although project financing techniques appear to
highly leverage available Eximbank resources, Eximbank officials said
that this technique is suited only to long-term capital projects that
the Eximbank expects to be self-sustaining.  The Eximbank aims to
structure its project finance program so as to limit its risks and
minimize its budgetary costs. 


--------------------
\6 The Eximbank offers financing in markets that provide a reasonable
assurance of repayment. 

\7 Our analysis was based on an aggregate comparison of sovereign
financing provided by the Eximbank and other ECAs. 


   HIGH-RISK MARKETS ABSORB A
   RELATIVELY LARGE SHARE OF THE
   EXIMBANK'S PROGRAM SUBSIDY
------------------------------------------------------------ Letter :3

From fiscal years 1992 to 1996, the Eximbank supported an average of
$13.3 billion in export financing commitments (loans, loan
guarantees, and export credit insurance) per year at an average
subsidy cost of $750 million.  These financing commitments supported
U.S.  exports to a number of low-, medium-, and high-risk markets. 
In fiscal year 1995, financing commitments to high-risk markets such
as the NIS represented a relatively small percentage of the
Eximbank's total financing commitments but accounted for a relatively
large share of total subsidy costs. 

As shown in figure 1, the Eximbank's export financing commitments
reached an all-time high of $15.1 billion in fiscal year 1993. 
According to the Eximbank, the subsequent decline in export financing
commitments is largely attributable to the economic downturn in some
Latin American countries and a cyclical decline in U.S.  aircraft
exports.  The Eximbank's subsidy costs ranged from a low of $603
million in fiscal year 1992 to a high of $937 million in fiscal year
1994 and dropped to $864 million in fiscal year 1996.  This trend is
a reflection of the Eximbank's financing activity in high-risk
markets. 

   Figure 1:  Eximbank Financing
   Commitments and Credit Subsidy
   Costs, Fiscal Years 1992-96

   (See figure in printed
   edition.)

Note:  Administrative costs are not included in subsidy cost totals. 

   Source:  Eximbank.

   (See figure in printed
   edition.)

As shown in figure 2, most of the Eximbank's fiscal year 1995
financing commitments were in the low- and medium-risk categories. 
Financing commitments for high-risk markets represented a relatively
small (13 percent) share of total financing commitments yet absorbed
a relatively large (44 percent) share of credit subsidy costs. 

   Figure 2:  High-risk
   Commitments Absorbed Large
   Share of Credit Subsidy Cost in
   Fiscal Year 1995

   (See figure in printed
   edition.)

Note:  1.Low risk includes countries with A or B risk ratings; medium
risk includes C, C-, D risk countries; and high risk are D-, E, and
E- rated countries.  The Eximbank also made $6.7 million in financing
commitments and incurred $2.6 million of subsidy cost to F markets in
fiscal year 1995.

2."Other" category includes short-term insurance and working capital
guarantees. 

   Source:  Eximbank.

   (See figure in printed
   edition.)

In 1995, the Eximbank approved 2,049 financing transactions.  As
shown in figure 3, most of these transactions--83 percent--were made
at or below a subsidy rate of 10 percent.  The average subsidy rate
for the
2,049 transactions was 5.6 percent; the range of the subsidy rates
provided through these transactions varied from 0 percent to 63
percent.\8

   Figure 3:  Distribution of
   Eximbank Transactions, by
   Subsidy Rates, Fiscal Year 1995

   (See figure in printed
   edition.)

   Source:  Eximbank.

   (See figure in printed
   edition.)

Eximbank support is provided to a variety of markets.  In 1995, Latin
America represented the largest single geographical region of
Eximbank financing commitments and consumed the largest share (31
percent) of the Eximbank's total subsidy costs.  On the other hand,
financing commitments to the NIS represented a relatively small share
of overall financing commitments yet absorbed a relatively large
share (23 percent) of the Eximbank's total subsidy costs (see fig. 
4). 

   Figure 4:  Allocation of
   Eximbank Credit Subsidy Costs
   and Financing Commitments by
   Region, Fiscal Year 1995

   (See figure in printed
   edition.)

Note:  Other includes OECD countries and other transactions not
allocated to specific countries. 

   Source:  Eximbank.

   (See figure in printed
   edition.)

In fiscal year 1995, Mexico was the largest market for
Eximbank-financed exports ($1.3 billion in total commitments) and
absorbed the second largest individual share ($79 million) of the
Eximbank's total subsidy costs.  In contrast, Russia was the fourth
largest market ($521 million in fiscal year 1995) yet absorbed the
largest individual share ($94 million) of the Eximbank's subsidy
costs.  (See fig.  5.) Since 1992, Mexico has been the largest market
for Eximbank-financed exports; Eximbank-supported exports to Russia
increased from $65 million in fiscal year 1992 to $521 million in
fiscal year 1995. 

   Figure 5:  Top Eight Country
   Recipients of Eximbank Credit
   Subsidy Cost (and Associated
   Financing Commitments), Fiscal
   Year 1995

   (See figure in printed
   edition.)

   Source:  Eximbank.

   (See figure in printed
   edition.)


--------------------
\8 Zero subsidy transactions include those with "negative subsidies,"
i.e., transactions that returned a "net profit" to the Eximbank. 


   RAISING FEES FOR SERVICES IS A
   POLICY OPTION
------------------------------------------------------------ Letter :4

One option we identified for reducing subsidy costs at the Eximbank
would be to increase the fees\9 charged for the Eximbank's financing
programs while still satisfying the congressional mandate for setting
program fees at levels that are fully competitive with other ECAs. 
The Eximbank currently sets its fees so that they are as low as or
lower than about 75 percent of the fees charged by other major ECAs
in the same importing country markets.\10 Our analysis showed that if
the Eximbank had raised its fees to a level as low as or lower than
55-60 percent of the fees charged by other major ECAs in the same
markets, the Eximbank's subsidy cost would have been about $63
million less in fiscal year 1995.  The actual cost reductions
associated with any fee increase would depend on the magnitude of the
fee increases and on other variables, such as the sensitivity of U.S. 
exporters to price increases, as well as the risk levels, terms, and
conditions of future transactions.  Eximbank officials expressed
concerns that raising fees could affect the international
competitiveness of U.S.  exporters who rely upon Eximbank programs. 

The U.S.  government has been an advocate for ongoing efforts among
OECD members to establish guidelines for setting fees for
government-supported export financing.  Ideally, such guidelines
would provide all ECAs, including the Eximbank, an opportunity to
reduce their subsidy costs without putting their exporters at a
disadvantage relative to their competitors.  Any proposed Eximbank
fee increases need to be considered within the context of the ongoing
OECD negotiations to reduce government export credit subsidies. 


--------------------
\9 As used in our report, the term "fees" applies to risk exposure
fees charged for the Eximbank's loan and loan guarantee programs as
well as the insurance premiums charged for its insurance programs. 
The purpose of these fees is to compensate for the risk the Eximbank
assumes when it supports a loan, guarantee, or insurance transaction. 
This fee is payable as the loan is disbursed, or it may be financed
as part of the transaction.  This fee is not to be confused with the
Eximbank's flat rate application processing fee or the commitment fee
(a fee charged on the undisbursed portion of the Eximbank loan). 

\10 An importing country market is the market in which the U.S. 
exports are sold, using Eximbank financing support. 


      THE EXIMBANK'S FEE SYSTEM
---------------------------------------------------------- Letter :4.1

The Eximbank charges fees in an attempt to compensate for the
financial risks associated with direct loans, loan guarantees, and
insurance.  (Credit subsidy costs arise when the present value of
fees, principal repayments, and interest payments is below the levels
necessary to offset the present value of the expected government
outlays.) Under its system, the Eximbank places each
borrower/guarantor in one of eight country risk categories--A, B, C,
C-, D, D-, E, and E-.  Fee rates are based primarily on the assessed
risk of the particular credit and the repayment term of the
transaction.  For example, a transaction with a repayment term of 5
years in the lowest risk category (A) would be charged a fee of $1
per $100, whereas one in the highest risk category (E-) would be
charged a fee of $7.59 per $100 of each disbursement.  The Eximbank
periodically revises its fee levels to help ensure that they
appropriately reflect credit risks and, at the same time, remain
competitive with those of other ECAs.  In 1995, the Eximbank adopted
a transaction pricing approach for assessing risk and assigning fees
for individual, nonsovereign credits in order to better deal with a
growing portfolio of private risk.\11


--------------------
\11 Previously, the Eximbank's exposure fees were based only on
whether the borrower was public or private and did not discriminate
between credits of varying risk within the public or private sectors
of a country.  Transaction pricing provides more flexibility to the
Eximbank by allowing it to distinguish among public and private
borrowers.  Those with international capital market access and strong
credit ratings are charged comparatively lower fees while higher-risk
borrowers are charged higher fees. 


      FEE INCREASES COULD LEAD TO
      SIGNIFICANT SUBSIDY SAVINGS
---------------------------------------------------------- Letter :4.2

The Export-Import Bank Act of 1945, as amended (12 U.S.C.  635),
gives the Eximbank discretion to set fees at levels that are
commensurate with risks, but at the same time at levels that are
"fully competitive" with the pricing and coverage of the export
credit programs offered by other major ECAs.\12 According to Eximbank
officials, the Eximbank has interpreted "fully competitive" to mean
that the Eximbank's fees should be as low as or lower than about 75
percent of the fees charged by other major ECAs in the same importing
country markets.  They noted that the Eximbank's goal is not to beat
the lowest fee, but to be in the "best 20-25 percent" range.  The
implementation of this benchmark means that the Eximbank's fees are
generally as low as or lower than those charged by foreign ECAs. 

To illustrate the potential savings associated with changing the
benchmark, we considered three possible scenarios.  Our analysis
shows that the Eximbank could have reduced its subsidy costs by about
$63 million if it had set its fees to be as low as or lower than
55-60 percent of the fees charged by other major ECAs for sovereign
financing in the same importing country markets.  We used Eximbank
program authorization data for fiscal year 1995, Eximbank fee
data,\13 and the same OMB financial model that the Eximbank uses to
calculate its subsidy costs.\14 To perform this analysis, we modeled
the effects of raising fees by different percentage rates while
holding all other variables in the OMB model constant, such as the
dollar value of Eximbank-supported transactions, the interest rate,
and the repayment term.\15 Using the same methodology, we estimated
that the Eximbank could have achieved approximately $35 million in
subsidy savings by setting its fees so that overall, they were as low
as or lower than about 65-70 percent of the fees for sovereign
financing charged by its major ECA competitors in the same markets,
and approximately $84 million in savings by setting fees so that they
were as low or lower than about 45-50 percent of the fees charged by
these competitors.  (See table 1.)



                                Table 1
                
                Estimated Eximbank Subsidy Savings With
                    Fee Increases, Fiscal Year 1995

                         (Dollars in millions)

                                      Estimated savings
                        ----------------------------------------------
                        Fees as low as  Fees as low as  Fees as low as
                         or lower than   or lower than   or lower than
                             45-50% of       55-60% of       65-70% of
                          competitors'    competitors'    competitors'
Eximbank Programs                 fees            fees            fees
----------------------  --------------  --------------  --------------
Medium-and long-term            $14.99          $11.89          $ 5.60
 loans
Medium-term insurance            10.11            5.75            4.22
Medium-and long-term             59.29           45.19           24.68
 guarantees
======================================================================
Total savings                   $84.39          $62.83          $34.50
----------------------------------------------------------------------
Notes:  1.  With the exception of fees and risk premiums, all
variables in the OMB subsidy calculation model were held constant.

2.  We based our analysis on fiscal year 1995 transactions.

3.  Comparisons were based on an analysis of the fees charged as of
April 1995 by the Eximbank and five major ECA competitors.

4.  Our analysis does not take into account restrictions on coverage
imposed by some ECAs, including the Eximbank, on a country
market-specific basis, typically in the higher-risk markets.

5.  The Eximbank counts its fees as lower than those of another ECA
if the Eximbank was open in a specific country market where that ECA
was closed.

6.  The estimated savings figures could be slightly higher because
our analysis does not include project finance, aircraft, short-term
insurance, tied aid, and working capital guarantee transactions.

7.  The Eximbank bases its fee comparisons on medium- and long-term
sovereign transactions.

8.  The totals may vary due to rounding. 

   Source:  Eximbank and GAO
   analysis.

   (See figure in printed
   edition.)


--------------------
\12 The act stipulates that "the Bank shall charge fees and premiums
commensurate, in the judgement of the Bank, with risks covered in
connection with the contractual liability that the Bank incurs for
guarantees, insurance, coinsurance, and reinsurance against political
and credit risks of loss." (Section 2(c)(1)).  Simultaneously, the
Eximbank is directed to "provide guarantees, insurance, and
extensions of credit at rates and on terms and other conditions which
are fully competitive with the Government-supported rates and terms
and other conditions available for the financing of exports from the
principal countries whose exporters compete with United States
exporters." (Section 2(b)(1)(A)). 

\13 The Eximbank compares its fees with those of its competitors in
36 importing countries for long-term transactions and 44 importing
countries for medium-term transactions. 

\14 Although the Eximbank and other ECAs regularly exchange
information on fees and other program characteristics, Eximbank
officials said they use caution when interpreting these data.  Direct
comparisons are difficult because ECAs may assign different risk
levels to the same importing countries. 

\15 We acknowledge that when prices increase, quantity demanded
typically falls.  We did not have the data to model the sensitivity
of quantity demanded to changes in price. 


      COMPETITIVENESS IMPLICATIONS
      OF RAISING FEES
---------------------------------------------------------- Letter :4.3

According to the Eximbank, several factors play a role in the
competitiveness of the loan, guarantee, and insurance programs that
the Eximbank offers.  These include both external factors (those that
contribute to the overall demand for Eximbank support) and factors
that are, to a greater extent, within the control of the Eximbank,
such as the fees it charges and other technical program
characteristics.\16 Although interest rates and repayment terms for
export credits (i.e., direct loans) are elements of cost
competitiveness, they are highly constrained by the provisions of the
OECD's Arrangement on Guidelines for Officially Supported Export
Credit.  These provisions limit the variability of interest rates
charged and repayment terms allowed by member ECAs.  Since exposure
fees charged for loans, loan guarantees, and insurance are now
excluded from the OECD Arrangement, differences in fees are the most
significant factor accounting for program cost differences between
the Eximbank and other ECAs. 

When we asked Eximbank officials about the prospects for future fee
increases, they responded that the Eximbank had raised fees in August
1994 and expressed concerns about how future increases would affect
U.S.  export competitiveness.  They said that should the Eximbank
lower its "competitiveness target," the number of instances in which
U.S.  exporters would risk losing sales as a result of uncompetitive
financing would also increase.  At the same time, Eximbank officials
said it is difficult, if not impossible, to predict the impact of fee
changes on exporter behavior, because exporters' sensitivity to fee
changes would vary by transaction. 

As noted earlier, Eximbank fees are generally as low as or lower than
those of its major competitors in most country markets.  In some of
the higher-risk markets, the Eximbank's fee advantage over some of
its competitors is even greater.  For example, Eximbank fees are as
low as or lower than those of its major competitors for about 85
percent of medium-term transactions in high-risk markets.  Thus, we
believe it would be possible for the Eximbank to further offset
subsidy costs by raising fees while remaining competitive relative to
other major ECAs.  For instance, if fees were set at the 65-percent
competitiveness level, Eximbank fees would still be as low as or
lower than those of other ECAs in 65 percent of the same importing
country markets, and the proportion of cases in which its fees would
be higher than other ECAs would increase from 25 percent to 35
percent. 

The trade implications of increasing the Eximbank's fees are
uncertain and would depend in part on the magnitude and timing of
such action.  It is possible that charging higher fees would result
in an incremental reduction in program participation on the part of
U.S.  exporters selling to some higher-risk markets.  However, the
overall impact of Eximbank fee increases are speculative.  U.S. 
exporters' sensitivity to a fee increase would depend on factors such
as the size of the fee increase, the volume of U.S.  exports to a
particular market, and the risk of the importing market.  Raising
fees for financing transactions in the higher-risk markets, such as
the NIS, could lead to a decline in U.S.  exports to these countries,
but we were unable to quantify the precise impact. 


--------------------
\16 According to the Eximbank, external factors include movements in
several basic economic variables, such as non-OECD import demand
(especially for capital goods), the value of the dollar relative to
other competitors' currencies, and the supply of private export
financing.  Factors that are more within Eximbank control include the
technical aspects of its programs, such as cost; risk-taking; special
programs, such as tied aid and project finance; and program
attributes, such as foreign content and local cost policies. 


      OECD MEMBERS' EFFORTS TO
      MINIMIZE FEE DIFFERENCES
---------------------------------------------------------- Letter :4.4

The Eximbank, under the leadership of the U.S.  Treasury,
participates in ongoing OECD negotiations to minimize export
financing competition and reduce government export credit
subsidies.\17 In order to remain competitive, any potential Eximbank
fee increase should be considered within the broader context of
progress made in these international negotiations. 

The United States, European Union (EU) member states,\18 and other
countries are attempting to limit government export credit subsidies
and create a level playing field among their ECAs through the OECD. 
The OECD has promoted efforts to limit government subsidies and
provide common guidelines for national export-financing assistance
programs.  The OECD's Arrangement sets terms and conditions for
government-supported export credits and has been progressively
strengthened since it was first established in 1978.  Although it was
last modified in 1994 to require member countries to use only
market-based interest rates on all government-provided export loans,
it does not currently contain guidelines as to the minimum fees
member ECAs must charge for officially supported loans, loan
guarantees, or export credit insurance. 

In 1994, the participants in the OECD Arrangement formed a Working
Group of Experts on Premia and Related Conditions to create a
framework for more uniform risk premiums (i.e., exposure fees).  The
working group's goal is to develop guiding principles for setting
fees, among other issues, before the 1997 OECD Ministerial Meeting. 
As part of this overall effort to gradually reduce government export
finance subsidies, OECD members have tentatively agreed to work
toward creating member export financing systems that include, among
other things, (1) risk-based premiums (defined to include exposure
fees) based on a common reference country classification system, (2)
premiums that are set high enough to cover long-term operating costs
and losses, and (3) establishment of a fee benchmarking system. 
According to an Eximbank official, it is hoped that these
negotiations will eventually lead to an agreement for fee convergence
that would allow for reductions in the costs of OECD members'
officially supported export financing programs.  The agreement would
be implemented after an appropriate transition period. 

The U.S.  government is an advocate for reaching an OECD agreement in
this area.  Although the working group has developed a set of broad
guiding principles, members have yet to agree on the extent to which
fees should be covered by the OECD disciplines (practices), according
to the Eximbank. 


--------------------
\17 The Export-Import Bank Act of 1945, as amended, directs the
Eximbank to participate in multilateral discussions to minimize
competition among government ECAs.  For example, section 2(b)(1)(A)
provides that "the Bank shall .  .  .  seek to minimize competition
in government-supported export financing and shall .  .  .  seek to
reach international agreements to reduce government subsidized export
financing."

\18 The EU, formerly the European Community, is a political and
economic union of 15 European countries. 


   RISK REDUCTION COULD LEAD TO
   REDUCED SUBSIDY COSTS AND LOWER
   OVERALL EXPOSURE
------------------------------------------------------------ Letter :5

The level and scope of the risks of the Eximbank's programs could be
reduced by several means, such as placing a ceiling on the maximum
subsidy rate allowed in Eximbank transactions, reducing or
eliminating program availability offered in high-risk markets, and
offering less than 100-percent risk protection.  Although these
options, if implemented, could lead to significant subsidy savings
for the Eximbank and an overall reduction in U.S.  exposure to
high-risk markets, they would also result in reduced levels of
Eximbank-financed exports and could present important foreign policy
tradeoffs.  Representatives of the Eximbank, private financial
institutions, and export finance trade associations we spoke to
generally opposed making any changes to the Eximbank's programs on
the grounds that potentially disruptive effects would result. 

As shown in table 2, the options we identified, if implemented
separately, would have resulted in subsidy savings of up to $157
million in fiscal year 1995, with only a slight effect (5 percent or
less of total exports financed) on the overall level of U.S.  exports
supported with Eximbank financing.  The estimated subsidy reductions
and export losses listed were based on our analysis of Eximbank
subsidy estimates and authorized commitments for fiscal year 1995. 
Our estimates assumed that all other factors, such as the volume of
financing to specific markets, were unchanged and there was no
reaction by other ECAs. 



                                     Table 2
                     
                       Estimated Subsidy Savings Associated
                     With Reducing Eximbank Risks for Fiscal
                               Year 1995 Activities

                              (Dollars in millions)

                                            Options
                ----------------------------------------------------------------
                                  Provide only
                Subsidy cap of      short-term
                       25% for  cover in high-       Eliminate  Require 5%
                    individual  risk (E and E-  cover in risky  private sector
                transactions\a     ) markets\b  (E-) markets\b  risk-sharing\c
--------------  --------------  --------------  --------------  ----------------
Estimated                 $123            $157            $122  About $5 million
 program                                                         but could be
 subsidy                                                         substantially
 savings                                                         greater.\d
Estimated                 $369            $582            $394  Could not derive
 decrease in                                                     a meaningful
 Eximbank-                                                       estimate.
 supported
 exports
Estimated                  3.1             4.9             3.3  Could not derive
 decrease in                                                     a meaningful
 Eximbank-                                                       estimate.
 supported
 exports as a
 percent of
 total
 Eximbank-
 financed
 exports
--------------------------------------------------------------------------------
Note:  The estimated program subsidies were computed as if they were
stand-alone options. 

\a To compute the estimated subsidy savings related to the 25-percent
fee cap option, we subtracted the value of transactions whose subsidy
rate exceeded 25 percent from total subsidy usage and export
commitments for fiscal year 1995. 

\b We assumed that once the Eximbank ceases to provide long- to
medium-term support in the E and E- markets, or withdraws from the E-
market transactions, the subsidy savings would not have been used to
support additional transactions in other markets. 

\c The Eximbank calculated the impact of this option only for
guarantees for the D to E- risk categories and assumed a 5-year term
and 2-year grace period.  This analysis did not include an estimate
for guarantees with a term of over 5 years nor an estimate for loans. 

\d The Eximbank did not include an estimate of longer-term
transactions (greater than 5 years) in higher-risk markets in its
analysis.  These transactions typically involve larger subsidies and
therefore would result in greater subsidy savings if risks were
shared. 

   Source:  GAO analysis of
   Eximbank data.

   (See figure in printed
   edition.)


      CAP MAXIMUM SUBSIDY RATES
---------------------------------------------------------- Letter :5.1

To reduce its subsidy costs, the Eximbank could consider placing a
cap (limit) on the maximum subsidy rate that it could incur in a
typical transaction (this would not include tied aid
transactions).\19 For example, although most of the 2,049
transactions completed in fiscal year 1995 had a 10-percent subsidy
rate or less, a relatively few (38) transactions had a subsidy rate
of 25 percent or more.  These transactions consumed approximately
$123 million (about 18 percent) of the Eximbank's total subsidy costs
yet supported 3 percent of Eximbank export financing commitments for
the year.  We estimate that if the Eximbank had capped its subsidy
rate for each transaction at 25 percent for fiscal year 1995, it
would have saved about $123 million (assuming that fees were held
constant and deals over a subsidy rate of 25 percent were not
refinanced at lower rates). 

Eximbank officials noted that a subsidy cap could have a
disproportionate impact on high-risk markets, such as the NIS, and
therefore would limit the Eximbank's ability to support high-risk
transactions in these markets.  However, we noted that this option
consists of a subsidy cap that exceeds the average subsidy rate (21.6
percent) for all Eximbank-supported transactions to the NIS.  In
other words, this option is unlikely to eliminate all financing
transactions in this market--just those with a subsidy rate greater
than 25 percent. 


--------------------
\19 Tied aid refers to foreign assistance that is linked to the
purchase of exports from the country extending the assistance.  Tied
aid can consist of (1) foreign aid grants alone, (2) grants mixed
with commercial financing or official export credits ("mixed
credits"), or (3) concessional (low-interest rate) loans.  The
Eximbank needs to retain its flexibility in responding to the tied
aid offers of foreign competitors because U.S.  exporters can be put
at a competitive disadvantage in bidding on overseas projects when
foreign competitors make tied aid available. 


      REDUCE EXIMBANK PROGRAM
      AVAILABILITY IN HIGH-RISK
      MARKETS
---------------------------------------------------------- Letter :5.2

Before 1994, the Eximbank provided short-, medium-, and long-term
financing in low- and medium-risk markets.\20 In 1994, as part of an
effort to provide additional support to emerging market economies,
the Eximbank expanded the level of financing available to U.S. 
exporters to high-risk E and E- markets to include long-term coverage
for E markets and medium-term cover for E- markets.  As a result, in
fiscal year 1995, Eximbank services were available in more E- markets
than were those of any of its major competitors, and the Eximbank
provided unrestricted program cover\21 for almost twice as many
markets as did Germany, its nearest competitor.  The Eximbank cannot
operate in certain high-risk markets (F risk category) because, in
the judgment of its board, the Eximbank cannot expect reasonable
assurance of repayment.\22

Another way in which the Eximbank could reduce its risk and
associated subsidy costs in the high-risk (E and E-) categories would
be to provide only short-term support in high-risk markets. 
Short-term transactions typically involve lower risks and subsidy
expenditures than medium- and long-term transactions in the same
market.  We estimated that this option would have reduced subsidy
costs by up to $157 million (23 percent of the Eximbank's total
subsidy costs) and reduced the Eximbank financing commitments by
approximately $582 million, or about 5 percent, in fiscal year 1995. 

Another option that the Eximbank could consider would be to withdraw
completely from E- markets; this would substantially reduce its
exposure to high-risk transactions.  Eliminating coverage in the
Eximbank's most risky markets (E-) would have produced subsidy
savings of up to $122 million and eliminated approximately $394
million in Eximbank export financing commitments in fiscal year
1995--about 3 percent of the Eximbank's total financing commitments
for the year. 


--------------------
\20 As defined by the Eximbank, "short term" involves credit terms of
1 year or less; medium-term cover for capital goods and related
services involves financing of $10 million or less, with a usual
repayment term of 1 to 5 years; and long-term cover involves
financing of more than $10 million or repayment terms of greater than
5 years. 

\21 According to the Eximbank, restrictions on cover are often
differentiated by term and sector
(i.e., private, public, or sovereign) within a given market. 
Restrictions may take various forms such as limits on total activity
or security requirements for a specific buyer. 

\22 According to the Eximbank, limitations on the availability of
Eximbank financing apply to "routine" business transactions. 
However, the Eximbank may provide support for transactions that
provide reasonable assurance of repayment even when these
transactions are in markets that do not provide this level of
assurance.  These transactions may involve borrowers that have a
record of independent access to private or international capital
markets, utilize insulated project finance structures with hard
currency earnings and escrow accounts for debt payment, or use
secured aircraft leases. 


      IMPLICATIONS OF REDUCING
      EXIMBANK PROGRAM
      AVAILABILITY IN HIGH-RISK
      MARKETS
---------------------------------------------------------- Letter :5.3

This option would result in a reduction of Eximbank subsidy costs but
there could be implications for trade promotion and foreign policy
objectives.  First, Eximbank officials and some U.S.  exporters
stated that while exports to high-risk (E and E-) markets are small
relative to total U.S.  exports, the long-term export potential of
these markets could be substantial.  Eximbank officials point out
that one of the agency's primary objectives is to help U.S. 
exporters gain an early foothold in the high-risk, potentially
high-growth markets in which the private sector is unable or
unwilling to venture.\23 Second, reducing program availability in
high-risk markets would result in a reduction in Eximbank-supported
transactions to transitional market economies, such as Russia, that
the U.S.  government's foreign policy establishment is trying to
assist.  Eximbank officials said that the Eximbank is an independent
agency and not part of the U.S.  foreign policy or assistance
apparatus ( i.e., the Eximbank will not support a noncreditworthy
transaction to meet U.S.  foreign policy objectives).  However, they
stated that restrictions on Eximbank financing to high-risk markets
such as the NIS may be perceived as a reduction of U.S.  support for
the region and detract from the U.S.  government's efforts to promote
regional stability. 

The potential negative effect of this option on trade and foreign
policy objectives could be moderated in a number of ways.  Various
export financing techniques exist that would allow the Eximbank to
reduce the risks of some of the transactions in these markets.  For
example, the Eximbank's Russian Oil and Gas Framework Agreement,
which gives support for longer-term transactions that generate hard
currency earnings, has relatively lower risks and thus is the
recipient of full Eximbank support.  These transactions are budgeted
at lower subsidy rates. 

It is also important to note that a number of other federal programs
support U.S.  foreign policy objectives in the NIS.  Since 1990, 23
government agencies have obligated $5.4 billion for technical
assistance programs, grants, exchange programs, training, food and
commodity donations, science and technology projects, and support of
joint space efforts.  The U.S.  government also made available $10
billion in credit for bilateral loans, loan guarantees, and insurance
programs for fiscal year 1990 through December 1994.  Trade and
investment programs include those sponsored by the Department of
Agriculture and the Overseas Private Investment Corporation (OPIC). 
Thus, concerns about restrictions on Eximbank support and its impact
on U.S.  policy objectives in this region would need to be viewed in
the broader context of the overall U.S.  assistance effort. 


--------------------
\23 The Export Enhancement Act of 1992 provides that it is the policy
of the United States to "assist the export of high technology exports
to emerging democracies" and that the Eximbank shall "develop a
program for providing guarantees and insurance with respect to the
export of high technology items to countries making the transition to
market based economies.  .  .  ." (P.L.  102-429, sec.  114, Oct. 
21, 1992). 


      GREATER PRIVATE SECTOR
      RISK-SHARING
---------------------------------------------------------- Letter :5.4

Currently, the Eximbank provides 100-percent unconditional political
and commercial risk protection on virtually all of the medium- and
long-term cover that it issues.  Some of the Eximbank's major
competitors, such as European ECAs, on the other hand, generally
require exporters and banks to assume a portion of the risks
associated with such support and do not absorb 100 percent of the
risks involved.  Instead, they require that exporters or banks assume
a minimum percentage (usually 5 percent to 10 percent) of the risks. 
This concept of risk-sharing is a fundamental difference between the
Eximbank and EU ECAs.\24

One way to reduce the Eximbank's subsidy costs across all risk
categories would be to have private sector participants assume more
of the risks in Eximbank-supported transactions.  For example, if the
Eximbank only financed up to 95 percent of the risks of an export
transaction, private sector banks or exporters would have to assume
the remaining 5 percent risk.  According to Eximbank officials, this
requirement may also provide private sector lenders greater
incentives to properly evaluate loan applications for which they seek
Eximbank support because they will share more of the risks associated
with such transactions. 


--------------------
\24 In addition, most EU ECAs provide export financing on a more
conditional basis, i.e., payment of any claims is conditioned on the
claims meeting certain pre-agreed conditions, while the Eximbank
certifies that conditions are fully met before providing its support. 
For more information on the differences between Eximbank and EU ECAs,
see Export Finance:  Comparative Analysis of U.S.  and European Union
Export Credit Agencies (GAO/GGD-96-1, Oct.  24, 1995). 


      IMPLICATIONS OF GREATER
      PRIVATE SECTOR RISK-SHARING
---------------------------------------------------------- Letter :5.5

Eximbank officials said that the Eximbank does not generally require
the private sector to engage in greater risk-sharing in its loan
guarantee program because the private sector is usually unwilling to
accept the risks associated with Eximbank-financed transactions.\25
These officials cited a number of other concerns related to greater
risk-sharing, including (1) the presence of bank regulatory
requirements that banks maintain higher loss reserves for foreign
loans not fully covered by Eximbank guarantees, (2) the higher cost
of trade financing that would result if private lenders were required
to raise their fees to compensate for additional export risks, and
(3) the reluctance of smaller U.S.  banks to engage in trade finance
if they have to take on additional risk.  Representatives of trade
associations that we interviewed also stated that greater
risk-sharing requirements will frustrate the small businesses that
have fewer options to structure alternative financing than do large
firms.  Eximbank officials also told us that the introduction of
increased risk-sharing requirements may result in higher
administrative costs to the Eximbank and may also impair private
banks' ability to "securitize" loans backed by Eximbank
guarantees.\26

However, several factors may mitigate some of the effects of a
requirement for increased risk-sharing and should be considered as
well when assessing the feasibility of this option. 

  -- According to Eximbank officials, the agency used to require some
     risk-sharing and only started offering 100-percent risk coverage
     (principal and interest) through its loan guarantee program
     beginning in the late 1980s.  Before that, it offered 95-percent
     loan guarantees on interest. 

  -- Similar objections about increased private sector risk-sharing
     requirements were raised when the Eximbank reduced its risk
     coverage on its export working capital guarantee program from
     100 percent to
     90 percent of principal and interest in September 1994. 
     However, U.S.  exporters and their commercial lenders continued
     to use this program at an increased rate after these changes
     went into effect.  The volume of Eximbank export working capital
     loan guarantees increased 99 percent from fiscal year 1994 to
     fiscal year 1995.\27

  -- U.S.  banks that we interviewed acknowledged that they utilize
     the services of competitor ECAs that generally provide less than
     100-percent risk coverage in support of their trade finance
     activities. 

  -- Private sector lenders and a representative of Moody's Investor
     Services stated that Eximbank-backed loans with less than 100
     percent cover could still be securitized, although the structure
     and pricing of the security would reflect the higher marginal
     risk associated with the reduced U.S.  government cover. 


--------------------
\25 We noted that the Eximbank already requires risk-sharing with the
private sector in several programs, including its working capital
guarantee program and project finance program.  Under the working
capital guarantee program, the Eximbank's guarantee covers 90 percent
of the principal and interest.  The lender must retain a 10-percent
risk share in the loan.  Under its project finance program, the
Eximbank negotiates with various parties as to what risks it will
undertake after an extensive analysis of project elements and may
request collateral and other guarantees for aircraft transactions. 
In April 1996, the Eximbank launched a 1-year pilot study that
utilizes expanded risk-sharing with export financing entities in six
states:  Florida, California, Maryland, Minnesota, Massachusetts, and
Georgia. 

\26 Securitization is the process whereby loan obligations are
converted into securities and sold to investors who obtain a stream
of interest and principal payments at specific intervals over a
specified period of time.  This practice enables banks to make loans
that they otherwise might not have been able to make. 

\27 According to Eximbank data, approved working capital guarantee
commitments for fiscal year 1995 totaled about $302 million, a
99-percent increase from the approximately $152 million authorized in
fiscal year 1994.  According to the Eximbank, this increase may
reflect program enhancements such as improved application procedures
and the greater use of delegated authority by participating banks. 


   PROJECT FINANCE PROGRAM
   PROVIDES OPPORTUNITIES FOR
   POTENTIAL SUBSIDY REDUCTION
------------------------------------------------------------ Letter :6

Project financing is a rapidly expanding export financing mechanism
that the Eximbank is using to meet the needs of U.S.  exporters and
project sponsors while taking advantage of the growth of
privatization and private sector-oriented reforms in various
developing countries.  It involves lending for major capital projects
where the assurance of repayment is provided through the project's
structure and anticipated future revenues rather than through
sovereign or other forms of guarantee.  In contrast to traditional
Eximbank financing, the Eximbank and lending institutions depend
primarily upon the financial success of the project for the repayment
of loan principal and interest.  Project financing provides the
Eximbank considerable flexibility in stipulating which risks it will
assume on a project-by-project basis, thus permitting the government
to reduce risk and subsidy usage. 

Eximbank project financing support is generally available in A
through D risk markets, is available in E markets only in limited
circumstances, and is not available in E- markets.\28 Project finance
requires a relatively stable legal and commercial environment in the
host country in order for risk mitigation of the project to be
possible.  Some high-risk markets do not yet have the legal and
commercial structures that would make project finance possible.  Once
a project is completed, the Eximbank provides the same level of risk
coverage, that is, 100 percent guarantees, under its project finance
program as is currently available in its traditional program--but
only for the share of the project that is financed by the Eximbank. 
During the project construction period, the Eximbank provides only
political risk coverage; other risks are assumed by the private
sector. 

The Eximbank's policy is that the project sponsor and other
participants must assume a portion of the entire project risk and all
or most of the commercial and technical risks during the construction
phase of an infrastructure project.  The Eximbank may also share
project risks with other ECAs, multilateral institutions such as the
International Finance Corporation, or OPIC.  The Eximbank may also
look for opportunities to establish hard currency escrow accounts
outside the project country for certain projects and seek other risk
mitigation to protect taxpayer interests and to reduce the associated
subsidy costs.  According to the Eximbank, if properly structured,
these techniques can lower the risks for the Eximbank that would
otherwise be involved in supporting these transactions in risky
countries.  Because this program is fairly new, it is too early to
determine if budget estimates are accurate. 

Under the project finance program, many of the administrative costs
that the Eximbank traditionally incurs in evaluating a project's
financial, legal, and technical risks are to be borne by the private
sector rather than the Eximbank.  When the Eximbank assumes any
risks, private sector project participants are expected to pay
premiums that compensate the government for most of these risks. 
However, the Eximbank's ultimate flexibility in passing these costs
on to the private sector may be constrained by the level of fees
charged by competitor ECAs. 

Eximbank officials told us that the Eximbank's goal is to structure
project financing transactions in a manner that will ultimately
require no taxpayer subsidy.  Although the Eximbank has yet to meet
this program goal, the average subsidy rate for project finance
transactions was lower than the overall subsidy rate incurred for all
Eximbank transactions in 1996.  In that year, the average budgetary
cost for project finance deals was about 3 percent, whereas the
average cost for all Eximbank-supported transactions was 7.5 percent. 
According to Eximbank officials, the Eximbank's success in meeting
this goal will ultimately depend on its willingness and ability to
limit risk in high-risk transactions while complementing, but not
competing with, the private sector. 

The Eximbank's project finance program has expanded over the past few
years and has accounted for an increasing proportion of Eximbank
transactions.  In 1993, project finance accounted for less than 1
percent of the Eximbank's total financing commitments.  By fiscal
year 1995, project finance constituted almost 20 percent of the
Eximbank's total financing commitments.  The Eximbank attributes this
growth to developing countries' emphasis on privatization, their need
to reduce sovereign debt obligations, and the rapid economic growth
in emerging markets.  As shown in figure 6, Eximbank project
financing commitments expanded from $150 million in 1993 to $2.1
billion in fiscal year 1995--the program's first full year of
operation.  Eximbank project financing declined slightly, to $1.7
billion, in fiscal year 1996. 

   Figure 6:  Eximbank Project
   Financing, Fiscal Years 1992-96

   (See figure in printed
   edition.)

   Source:  Eximbank.

   (See figure in printed
   edition.)

From fiscal year 1993 to 1995, the Eximbank approved a total of 11
project finance transactions valued at more than $2.6 billion.  Six
of these projects were located in Asia, four in Latin America, and
one in Europe.  These projects were generally located in countries
that the Eximbank rates as medium-risk category countries and were
mostly power generation infrastructure projects. 

The growth of project financing is consistent with the Eximbank's
expanded financing of exports to private sector buyers in developing
countries.  According to Eximbank officials, in fiscal year 1992, 71
percent of the Eximbank's financing commitments were used to support
foreign public sector purchasers, while 29 percent was used to
support foreign private sector purchasers in emerging markets around
the world.  By fiscal year 1995, the ratio was reversed--about 35
percent of the Eximbank's commitments supported foreign public sector
purchases and about 65 percent supported foreign private sector
purchasers.  Although private sector purchasers are becoming larger
users of export financing in developing countries and the Eximbank's
project financing program provides the flexibility necessary for
reducing the subsidy cost of these transactions, this method of
financing is not suitable for all transactions.  It is best suited
for large transactions, for example, major infrastructure projects,
that generate revenues that are sufficiently high to repay debt
obligations. 


--------------------
\28 The Eximbank will only proceed with E-rated transactions where
some type of acceptable risk-sharing is provided by a creditworthy
sponsor. 


   CONCLUSIONS
------------------------------------------------------------ Letter :7

Eximbank financing helps support the sale of billions of dollars of
U.S.  goods and services to foreign markets each year consistent with
U.S.  foreign policy interests but comes at a cost to U.S. 
taxpayers--about $3.75 billion in appropriated program funds over the
last 5 years.  OMB projects a substantial decline in these resources
over the next 5 years. 

We identified two options for reducing the Eximbank's subsidy costs: 
(1) raising fees (based on a modified definition of "fully
competitive") and (2) reducing program risks.  If implemented, these
options may help the Eximbank respond to the projected decline in
resources over the next
5 years.  These options would not require a change in the
Export-Import Bank Act of 1945, as amended, because they fall within
its present authority.  However, these options need to be considered
within the full context of their trade and foreign policy
implications and should be consistent with the Eximbank's other
statutory obligations. 

Raising exposure fees within the context of ongoing international
negotiations to reduce government export credit subsidies seems to be
the least disruptive of the two options for a number of reasons. 
First of all, Eximbank fees for sovereign financing are generally
lower than those of other ECAs in most country markets.  Second, a
fee increase could be implemented without raising some of the foreign
policy concerns associated with restricting or eliminating program
coverage in certain risky markets.  Third, exposure fee increases are
compatible with U.S.  government efforts to minimize competition in
government-supported export financing among OECD members and
consistent with its legal directive to do so.  The magnitude and
timing of any fee increases should take into account progress in the
ongoing OECD negotiations to minimize the possible competitive impact
on U.S.  exporters. 


   AGENCY COMMENTS
------------------------------------------------------------ Letter :8

In commenting on a draft of this report, the Eximbank made four
general observations: 

  -- The subsidy cost computations should only be interpreted as
     approximations of the cost of the Eximbank's programs. 

  -- Because no estimate of the amount of lost exports, jobs, federal
     tax revenue, or other potential adverse consequences of raising
     fees or lowering the amount of the Eximbank's risk have been
     developed, the implementation of the options presented needs to
     be considered with great caution. 

  -- Taking unilateral action to increase fees could undermine the
     U.S.  negotiating position with other OECD members. 

  -- Other alternatives for reducing the Eximbank's budget that would
     not adversely affect the Eximbank's programs have not been
     considered. 

Regarding our cost computations, we used the same methodology for our
analysis that the Eximbank uses to estimate the subsidy costs for its
official budget submission to Congress.  We agree that the
methodology utilized to meet the requirements of the Credit Reform
Act yields estimates and that the actual costs for a particular case
may be higher or lower than the estimate.  However, since the actual
costs cannot be predetermined, these estimates can be used to make
rational program decisions. 

In preparing this report we did consider the likely impact of the
options we identified on Eximbank-supported exports.  We acknowledge
that we could not precisely quantify the impact of implementing the
fee increases.  Nevertheless, our review indicated that the Eximbank
could raise fees while still maintaining a competitive position
relative to other ECAs.  Moreover, we did estimate that the reduction
in Eximbank-financed sales associated with reducing program risks
would only have a slight effect (5 percent or less) on the overall
level of U.S.  exports supported with Eximbank financing in a given
year. 

Our past work has shown that no definitive empirical research exists
that demonstrates unequivocally the net macroeconomic impact on the
nation--positive or negative--of government funding for federal
export promotion programs or of reductions in Eximbank funding
levels.\29 It is difficult to fully quantify the net benefits of
federal export promotion programs because it is difficult to
demonstrate "additionality," that is, the level of exports that would
have been provided in their absence.  Proponents and opponents of
these programs have mainly relied on qualitative arguments to state
their cases rather than demonstrate quantitatively the impact on
exports, jobs, and federal tax revenue. 

We recognize that the most efficient means to reduce Eximbank
subsidies without disadvantaging U.S.  exporters is to reach
agreement with other ECAs to lower and eventually eliminate export
subsidies.  We clearly stated in the report that any proposed fee
increases should be considered only in the broader context of the
ongoing OECD efforts to negotiate minimum fee schedules and that the
magnitude and timing of such an increase should take into account
progress in these negotiations. 

Eximbank also commented that we did not recognize other alternatives
for reducing the Eximbank's budget without adversely affecting its
program.  While other options for reducing the Eximbank's funding may
exist, we believe that we focused on the two most feasible
ones--raising fees or reducing program risks--that could be
implemented within the Eximbank's existing authority.  The two
options proposed by the Eximbank (changing its program mix and making
greater use of asset-based financing) would have some drawbacks that
were not disclosed in its letter.  For example, the budgetary and
possible implementation difficulties associated with the greater use
of Eximbank loans as opposed to guarantees are not addressed in the
Eximbank's comments.  In addition, the potential for extending
asset-based financing beyond the areas noted in the Eximbank's
comments is uncertain.  Finally, it is not clear whether OMB would
endorse any of the Eximbank options noted in its letter. 

The Eximbank's comments are reprinted in appendix II, along with our
specific evaluation of them.  The Eximbank also provided technical
corrections and updated information that were incorporated throughout
the report where appropriate. 


--------------------
\29 See Export Promotion:  Rationales for and Against Government
Programs and Expenditures (GAO/T-GGD-95-169, May 23, 1995). 


   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :9

To develop information on how the Eximbank spends its program funds,
we reviewed budget data provided to us by the Eximbank and reviewed
various Eximbank reports, including annual reports, budget reports
from the Office of the Chief Financial Officer, and the Eximbank's
1992-96 Report to the U.S.  Congress on Export Credit Competition and
the Export-Import Bank of the United States.  In addition, we
completed a transaction analysis of the Eximbank's financing
commitments made in fiscal years 1994 and 1995, including an analysis
of the Eximbank's high-subsidy transactions.  We defined
"high-subsidy" transactions as those transactions that consumed $1
million or more of the Eximbank's subsidy budget in a given year or
consumed a subsidy of 15 percent or more of the financed amount.  We
did not independently verify the accuracy of this data.  Our report
focused on the Eximbank's use of its program subsidy
appropriation--the largest component of its annual appropriation.\30

To create a conceptual framework for identifying and assessing the
available options for reducing the Eximbank's subsidy appropriation,
we reviewed various governmental, research, and trade association
reports, including those of the Eximbank, the Congressional Budget
Office, the Institute for International Economics, the CATO
Institute, the Coalition for Employment Through Exports, and the
National Association of Manufacturers.  We also interviewed officials
from these organizations and the private banking industry to obtain
their views on the feasibility and likely impact of the options. 

To illustrate potential subsidy savings associated with different
levels of fees, we estimated the possible subsidy savings that would
have been obtained in fiscal year 1995 by setting fees within the
45-50, 55-60, and 65-70 percent competitiveness levels, holding all
other variables (such as dollar value of transactions, interest
rates, and repayment terms) constant.  We used aggregate Eximbank fee
data and an OMB financial model to perform this analysis.\31 (We did
these calculations by setting fees at a level that fell within the
range we specified.  Specifically, the fees selected for our analysis
at the 45-50, 55-60, and 65-70 percent competitiveness levels
included medium- and long-term fees set at the 47th and 46th, 57th
and 56th, and 66th and 65th percentiles, respectively).  These fee
comparisons were based on medium- and long-term sovereign financing,
which is currently the only basis for comparison, although we
recognize that an increasing portion of Eximbank program activity is
for nonsovereign transactions. 

Eximbank officials told us that any interpretation of such analysis
must include a recognition of the potential pitfalls of fee
comparisons.  The differences in program characteristics, coverage
restrictions, and other variables may limit the accuracy of such
comparisons.  We did not independently verify the accuracy of the
Eximbank's fee data or test the OMB's ICRAS subsidy model for
accuracy in predicting subsidy cost estimates.  Instead, we have
accepted the validity of the current model and explored the options
for reducing program subsidies through the data generated by the
current OMB-approved model. 

To assess the effects of limiting program risks, we identified the
Eximbank's financing and subsidy commitments made in various risk
categories.  We focused on the effects of limiting program risks in
higher-risk markets because the Eximbank's subsidy costs in these
markets are large relative to other markets.  We did not model the
effects that increased risk-sharing would have on the Eximbank's
subsidy expenditures; rather, we accepted the analysis that the
Eximbank completed on this issue. 

To complete our work related to project finance issues, we reviewed
trade and academic literature and interviewed project specialists at
the Eximbank and the World Bank, and interviewed financial experts in
Washington, D.C.; New York; and London. 

We conducted our review from February 1996 to September 1996 in
accordance with generally accepted government auditing standards. 


--------------------
\30 In fiscal year 1996, the Eximbank received a net program
appropriation of $744.5 million and a separate appropriation of $45.6
million for the Eximbank's administrative costs. 

\31 As required by the Federal Credit Reform Act of 1990, the
Eximbank calculates the estimated subsidies associated with its loan,
guarantee, and insurance programs based on guidance provided by OMB. 
The subsidy estimates are based on the following 15 variables:  (1)
the authorized amount of the transaction; (2) the commitment fee
rate; (3) the interest rate on the loan; (4) whether the interest is
capitalized; (5) the U.S.  Treasury interest rate prescribed for
credit reform calculations; (6) the exposure fee charge on the
transaction; (7) whether the exposure fee is capitalized; (8) the
risk premium associated with the term of the transaction and the OMB
risk classification; (9) the time period when interest repayment
begins; (10) the time period when principal repayment begins; (11)
the number of semiannual principal repayments; (12) the participant's
risk-sharing arrangements, if any; (13) the percentage of potential
loss the participant will take, if any; (14) the risk premium for
participant default, if any; and (15) the yearly disbursement
pattern.  These inputs are used to calculate the subsidy, i.e., the
estimated cost to the government, of the transaction. 


---------------------------------------------------------- Letter :9.1

As agreed with your office, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 30 days
after the date of this letter.  At that time, we will send copies of
this report to other congressional committees and the Chairman and
President of the Eximbank and will make copies available to other
interested parties upon request. 

This review was done under the direction of JayEtta Z.  Hecker,
Associate Director.  If you have any questions concerning this
report, please contact Ms.  Hecker at (202) 512-8984.  Major
contributors to this report are listed in appendix III. 

Sincerely yours,

Benjamin F.  Nelson
Director, International Relations
 and Trade Issues


THE FEDERAL CREDIT REFORM ACT OF
1990
=========================================================== Appendix I

After over 20 years of discussion about the shortcomings of using
cash budgeting for credit programs and activities, the Federal Credit
Reform Act of 1990 was enacted.\1 The act changed the budget
treatment of credit programs so that their costs can be compared more
accurately with each other and with the costs of other federal
spending. 

Prior to the act's implementation in fiscal year 1992, it was
difficult to make appropriate cost comparisons between direct loan
and loan guarantee programs and between credit and noncredit
programs.  Credit programs--like other U.S.  government
programs--were reported in the budget on a cash basis (i.e., loan
guarantees did not show up in the budget unless and until they
defaulted).  This created a bias in favor of loan guarantees over
direct loans.  In the budget year, loan guarantees appeared to be
free, while direct loans appeared to be expensive because the budget
did not recognize that at least some of the loan guarantees would
default and that some direct loans would be repaid.  Under the act,
the President's budget for fiscal year 1992 and after must include
the total estimated net cost to the U.S.  Export-Import Bank
(Eximbank) of the cash flows, discounted to present value, of its
direct loans, guarantees, and insurance. 

Credit reform requirements separate the government's cost of
extending or guaranteeing credit, called the "subsidy cost," from
administrative costs.  Administrative expenses receive separate
appropriations and are reported separately in the budget.  The Credit
Reform Act defines the subsidy cost of direct loans as the present
value--at the time of disbursement--of the net cash flows, that is,
the disbursements by the government minus estimated payments to the
government after adjusting for projected defaults, prepayments, fees,
penalties, and other recoveries.  The act defines the subsidy cost of
loan guarantees as the present value--at the time of disbursement--of
cash flows from estimated payments by the government (for defaults
and delinquencies, interest rate subsidies, and other payments) minus
estimated payments to the government (including fees, penalties, and
recoveries). 

Agencies subject to the Credit Reform Act, such as the Eximbank, use
a special budget system to record the budget information necessary to
implement credit reform.  Three types of accounts--program,
financing, and liquidating--are used to handle credit transactions. 
Credit obligations and commitments made on or after October 1,
1991--the effective date of credit reform--use only the program and
financing accounts.  The program account receives separate
appropriations for the administrative and the subsidy costs of a
credit activity.  When a direct or guaranteed loan is disbursed, the
program account pays the associated subsidy cost for that loan to the
financing account.  Figure I.1 diagrams this cash flow.  If subsidy
costs are accurate, the financing account will break even over time
as it uses its collections to repay its Treasury borrowings.  The
program account has a permanent, indefinite appropriation for
re-estimates made to cover estimation errors. 

Credit activities conducted before October 1, 1991, are reported on a
cash basis in the liquidating account.  This account continues the
cash budgetary treatment used before credit reform and has permanent,
indefinite budget authority to cover any losses. 

   Figure I.1:  Cash Flow Under
   Credit Reform

   (See figure in printed
   edition.)



(See figure in printed edition.)Appendix II

--------------------
\1 As title B of the Omnibus Budget Reconciliation Act of 1990 (P. 
L.  101-508, Nov.  5, 1990). 


COMMENTS FROM THE EXIMBANK
=========================================================== Appendix I



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)


The following are GAO's comments on the Eximbank's letter dated
November 6, 1996. 

GAO'S COMMENTS

1.  The Eximbank's portfolio reestimates are not directly comparable
to the Eximbank's credit reform estimates made for fiscal year 1996. 
Portfolio reestimates are conducted for the Eximbank's past
commitments that are still on the books, typically spanning a number
of years.  These projections are also estimates and the actual costs
of a particular commitment may ultimately be higher or lower.  Credit
reform subsidy allocations reflect only those commitments made in a
given fiscal year. 

2.  The report noted that it is difficult to estimate the full impact
of fee changes on exporter behavior and states that U.S.  exporters'
sensitivity to a fee increase would depend on several factors,
including the size of the fee increase, the volume of U.S.  exports
to a particular market, and the credit risk of the importing market. 
We did acknowledge that raising fees for financing transactions in
the higher-risk markets, such as the newly independent states of the
former Soviet Union (NIS), could lead to a decline in U.S.  exports
to these markets. 

3.  The report notes that to minimize the possible competitive impact
on U.S.  exporters, any proposed Eximbank fee increases should only
be undertaken in the broader context of ongoing Organization for
Economic Cooperation and Development (OECD) efforts to reduce
government export subsidies. 

4.  Export financing commitments could still be made in high-risk
markets even under the subsidy cap option we have identified.  This
option would not necessarily eliminate the financing of transactions
to high-risk markets--just those with a subsidy rate exceeding a
certain threshold.  Furthermore, transactions with subsidy rates
exceeding the threshold could potentially be restructured.  Moreover,
the foreign policy concerns associated with reducing Eximbank
coverage to the NIS could at least partially be mitigated by numerous
other U.S.  assistance programs that we identified. 

5.  The scope of our review did not include a consideration of this
option.  Thus, we cannot comment on the feasibility or the full
implications of this option contained in the Eximbank's comments. 

6.  As we noted in the report, our fee comparisons were based solely
on sovereign lending rates--the only type of lending where
comparative data was available. 

7.  We acknowledge that several factors may play a role in
determining the overall competitiveness of the Eximbank's programs. 
However, fees are generally the most significant difference between
the Eximbank and other export credit agency (ECA) programs.  Other
factors, such as interest rates and repayment terms, are highly
constrained by OECD agreements. 


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================= Appendix III

NATIONAL SECURITY AND
INTERNATIONAL AFFAIRS DIVISION,
WASHINGTON, D.C. 

John Hutton, Assistant Director
Stephen Lord, Evaluator-in-Charge
Sara Denman, Senior Evaluator
Rona Mendelsohn, Senior Evaluator (Communications Analyst)
Jane Li, Senior Economist
Eluma Obibuaku, Evaluator

OFFICE OF GENERAL COUNSEL

Richard Burkard, Senior Attorney


*** End of document. ***