Complaint to EU concerning alleged unlawful state aid to UK's export credit agency
Refinancing through GEFCO raises questions about ECGD's financial losses

first published 23 March 2010

In March 2010, The Corner House and Campaign Against Arms Trade (CAAT) submitted a complaint to the European Commission alleging that the UK gives unlawful state aid to GEFCO, a special purpose vehicle used by the UK's export credit agency, the Export Credits Guarantee Department (ECGD), to refinance its loss-making interest-rate support scheme provided to UK exporters.

After much correspondence, it emerged in March 2011 that the complaint should have been directed at the companies receiving the support rather than at GEFCO itself and should have cited a different clause in the WTO's Agreement on Subsidies and Countervailing Measures.

The groups will submit a new complaint on this basis.


Under one of the 60 or so agreements of the World Trade Organisation (WTO), the Agreement on Subsidies and Countervailing Measures (SCM Agreement),1 WTO member countries are prohibited from providing government or state subsidies to exporters.

When most of the WTO agreements were finalised back in 1994, however, the world's richest countries obtained an exception for their export credit agencies (ECAs) -- the organisations that use taxpayers' money to provide various financial services to private corporations from their home country to assist them in doing business abroad. This "carve out" from the WTO agreements permits ECAs to provide support to exporters as long as the ECAs cover all their operating costs and losses in the long-term. The intention is to prevent ECAs giving their national exporters a competitive advantage by subsidising their exports.

Since the WTO rules came into force in 1995, ECAs from the richer industrialised countries have argued that they do break even and are thus in compliance with the WTO "carve out". Critics, however, contend that many ECAs use a variety of mechanisms to circumvent the break-even rules. One of these mechanisms is the subject of the Complaint submitted by The Corner House and Campaign Against Arms Trade to the European Commission2 on 23 March 2010.

The Complaint alleges that the UK's export credit agency, the Export Credits Guarantee Department (ECGD), breaches the rules of the WTO's SCM Agreement on export subsidies by using an off-balance sheet special purpose vehicle (SPV),3 called the Guaranteed Export Finance Corporation (GEFCO), to refinance its loss-making interest-rate support scheme provided to UK exporters.

More specifically, the Complaint alleges that the financial support provided with taxpayers' money by the UK Treasury through ECGD to GEFCO constitutes unlawful state aid.

ECGD, FREF and GEFCO . . .

ECGD is a taxpayer-backed government department that provides insurance, loans, guarantees and credits to UK companies exporting goods and services against the commercial and political risks of operating abroad (particularly of not being paid).4 It charges companies premiums for these financial services, and since 1998 has been required under UK law to break even -- the taxpayer remains, however, as the ultimate guarantor of any losses.

Analysis of ECGD's annual accounts by The Corner House and CAAT raised questions about loans supported or guaranteed by ECGD through one of its programmes, the Fixed Rate Export Financing (FREF) scheme, which enables UK exporters to offer finance at a fixed interest rate to potential buyers of its goods and services. FREF has made massive losses in the past. Analysis revealed that ECGD's financial support offered through the FREF scheme is, in turn, refinanced by an investment company, Guaranteed Export Finance Corporation Plc (GEFCO), which was set up by ECGD in 1986 for this very purpose. GEFCO is said to be "off balance sheet" -- its transactions are not consolidated into ECGD's accounts as they are not considered part of ECGD's operations.

Refinancing involves replacing the repayment terms of a debt or loan by changing its interest rate or its duration or by consolidating several debts or loans into one loan. It is used to increase the likelihood that a debt will be repaid or to offer better terms to a borrower.

Since 1999, the UK Treasury, via ECGD, has been providing GEFCO with money to buy ECGD's loans, which GEFCO then refinances by using derivatives, such as interest rate swaps and other mechanisms. (Derivatives are the financial instruments at the heart of the current financial crisis.5) The money provided to GEFCO now amounts to a cumulative total of some £3.7 billion. (GEFCO also raises funds through the capital markets and from banks, and it trades in financial instruments, including derivatives, to reduce its exposure to fluctuations in interest and foreign exchange rates.)

In addition, all GEFCO's liabilities are guaranteed unconditionally by the Secretary of State for the Department of Business, Innovation and Skills (BIS) (and his/her predecessors) acting through ECGD. Such guarantees cover GEFCO's overdraft with the Lloyds Banking Group; any losses arising from its cross currency swaps, other loans and derivative trades carried out to refinance ECGD's loans; and any adverse fluctuation in the value of its assets.

Unsurprisingly, GEFCO's 2009 "Directors' Report and Financial Statement" records that such guarantees reduced GEFCO's credit risk exposure -- "the risk that a third party will default on its obligations under an agreement" -- from a potential £822.9 million to zero: any default would be paid for by the Treasury.

As stated, GEFCO's borrowings, lendings and operating costs are not consolidated with those of ECGD, but are counted as part of the national accounts of central government, even though ECGD provides its funding that is guaranteed by BIS.

Complaint concerning GEFCO: unlawful state aid

In the Complaint, The Corner House and CAAT argue that ECGD's provision of guarantees and loans to GEFCO contravenes EC Treaty rules on state aid because it "distorts or threatens to distort competition by favouring certain undertakings".

In particular, ECGD's loans and guarantees to GEFCO are not offered or made available to other companies; they permit GEFCO to access capital below market rates; and they allow GEFCO to deploy all its capital without having to set aside anything as collateral against credit, interest rate, currency and other market risks as other lenders (should) do. As a result, they give GEFCO a competitive advantage over other companies operating in the capital markets that might wish to refinance ECGD's export credit loans, amounting in effect to a monopoly.

Complaint concerning GEFCO: prohibited export subsidies

The Complaint also argues that ECGD's use of GEFCO circumvents and subverts the UK's obligations under the export subsidy provisions of both a 1998 EU Directive and the WTO's SCM Agreement.

These obligations require ECGD to charge its corporate customers insurance premiums that are adequate to cover the Department's long-term operating costs and losses -- the break-even requirement. The premiums must cover the costs of any refinancing of ECGD loans, whether undertaken directly by ECGD or by GEFCO with ECGD support.

The requirement's intention is undermined, however, if ECGD "hides" or effectively reduces its reported losses and operating costs. Because ECGD's and GEFCO's accounts are not consolidated, the operating costs of GEFCO's refinancing activities don't appear on ECGD's balance sheet, meaning that ECGD's accounts do not reflect its actual operating costs.

Another mechanism used by ECGD to refinance GEFCO's loans obscures the extent of its losses still further. Any default on a refinanced loan is covered by yet another additional loan to GEFCO from ECGD; this is not accounted for separately by either GEFCO or ECGD but is simply lumped together in GEFCO's accounts with other borrowings received. As a result, it is difficult, if not impossible, to assess how much of the money given to ECGD by the Treasury for GEFCO is for refinancing ECGD's loans and how much for writing off bad debt. The full extent of ECGD's losses is thus hidden.

The Corner House and CAAT Complaint alleges that, by removing from its balance sheet the operating costs and losses associated with refinancing its FREF loans, ECGD is violating the SCM Agreement.

The groups also informed ECGD, BIS and the Treasury about the Complaint on 26 March 2010.

Official response to Complaint

DG Competition responded to the Complaint on 7 May 2010, indicating that it would not take it forward because GEFCO did not appear to be in competition with any other commercial firm -- it was the only entity refinancing ECGD's loans -- and because it was a non-profit company. As a result, DG Competition maintained that ECGD support does not in fact distort competition or market prices, and thus is not unlawful. (It forwarded the points about prohibited export subsidies under the WTO Agreement to DG Trade.)

The Corner House and CAAT replied on 10 May, indicating that the two grounds on which DG Competition would not take the Complaint forward were incorrect. They provided more information about the definitions and understandings in UK law of non-profit companies, none of which apply to GEFCO, which is a for-profit public limited company. And while it is technically correct to state that GEFCO is not in competition with other firms, this is only because it has a monopoly over the refinancing of ECGD's loans as a direct result of the arrangements outlined in the Complaint. On ECGD's own admission, its arrangement with GEFCO results in cheaper refinancing terms. 

Two months later, on 12 July 2010, DG Competition indicated that it had taken up the issue with the UK authorities, asking them for their position and summary of the facts concerning the alleged state aid. It did not consider the issue of prohibited export subsidies to fall within its competence, but potentially that of DG Trade to which it passed the Complaint.

On 29 July 2010, DG Trade stated that it would look into the Complaint.

Two months later, on 30 September 2010, DG Trade replied that it would close the Complaint because it believes ECGD's Fixed Rate Export Financing (FREF) scheme is "in line with the OECD Arrangement on Export Credits and therefore consistent with the [WTO's] ASCM [Agreement on Subsidies and Countervailing Measures]."  

One day later, on 1 October 2010, DG Competition indicated that, on the basis of information supplied by the UK authorities (background on GEFCO and ECGD, and an accompanying letter), it did "not see grounds for continuing the investigation" regarding the alleged unlawful state aid.

The Corner House and CAAT wrote back to DG Competition and to DG Trade on 27 October 2010, arguing that none of the grounds upon which they had rejected the Complaint are in fact correct and requesting them to reconsider their decisions not to investigate it further. DG Trade responded on 16 November 2010 indicating that it would "analyse the issue".

DG Competition confirmed on 4 February 2011 that GEFCO's contract with ECGD forbade it from undertaking any other economic activity. As such, it did not constitute an "economic entity" and could not be the subject of a state aid complaint according to EU rules. Given this response, The Corner House and CAAT acknowledged on 2 March 2011 that their complaint should have been directed at the companies receiving support under ECGD’s Fixed Rate Export Finance (FREF) scheme rather than at GEFCO itself. Accordingly, they stated they would submit a new complaint on this basis.

DG Trade, meanwhile, repeated (on 15 March 2011) its assertion that FREF was an interest rate support scheme and argued that it was not therefore subject to the WTO's break even requirement because it applies only to export guarantees and export credit guarantees. In the light of this statement, The Corner House and CAAT acknowledged (om 14 April 2011) that they had cited the wrong clause of the WTO Agreement on Subsidies and Countervailing Measures (ACSM) when arguing that FREF was in breach of ASCM – and, again, informed DG Trade that they would be submitting a new complaint citing the correct clause.


1 The WTO's Agreement on Subsidies and Countervailing Measures (SCM Agreement) regulates the provision of subsidies and the countervailing measures countries can take to counter the effects of subsidized imported goods and services.

2 The Complaint was addressed to the Directorate-General (DG) for Competition, which establishes and implements competition policy across the 27 countries of the European Union. It is responsible for ensuring that national government interventions do not distort competition and trade between EU countries.

3 A special purpose vehicle (SPV), sometimes called a special purpose entity, is a legal entity (a limited company or a limited partnership, for instance) created to fulfil narrow, specific or temporary objectives -- a special particular specific purpose. SPVs are often registered in a tax haven or secrecy jurisdiction; GEFCO is registered in the UK.

4To obtain an export credit guarantee, the exporter takes out insurance with ECGD, which undertakes to pay the exporter for the exported goods should the importer default on payment. If it does have to pay up, ECGD typically passes on any debt that is not covered by the insurance premiums it has received from the exporter to the government of the importing country, adding it to the stock of bilateral debt owed to the UK government.

5 A derivative is an asset whose value depends on -- or is 'derived from' -- the future price of another underlying asset. There are three basic types of derivative: future, option and swap. For more information, see: A Crumbling Wall of Money: Financial Bricolage, Derivatives and Power.