Feature

posted 30 Nov 2001 in Volume 5 Issue 3

From sensor to shooter

James Caldwell, Executive Vice-President for Export Finance for UK defence giant BAE SYSTEMS, tells us what the world’s biggest defence exporter expects from the export credit agencies and banks.

Since the old British Aerospace acquired Marconi Electronic Systems (MES) and became BAE SYSTEMS it has more than doubled its size, and now ranks as the number one defence exporter worldwide.

The bringing together of British Aerospace and MES has resulted in a defence company with an impressive and comprehensive ability to supply the full range of defence equipment, ‘from sensor to shooter’. In other words, our product portfolio includes the means to detect a threat, analyse the threat, plan a response then execute that response.

One significant consequence of the creation of BAE SYSTEMS is the increase in the size of our business in North America. We now have over 20,000 employees in North America and an order book in excess of £2 billion, of which 85% is destined for the US government. We supply equipment for every major US air platform, and different parts of the company are active in support of both contenders for the joint strike fighter (JSF) programme.

We also remain very active in Europe. We maintain strong links with other European producers through partnerships and joint ventures while maintaining a significant proportion of our business under our sole control. The European defence and aerospace scene is interesting. If I asked you to name the major players you would probably come up with EADS, BAE SYSTEMS, THALES and Finmeccanica. If you asked me to explain the cross shareholdings between just these four then I would struggle. The reality is a lot more complex!

From this broad business base we have become the number one defence exporter worldwide with 80% of our sales going outside the UK. My job is to provide export credit and credit insurance solutions for our export customers. At any one time my team will be dealing with between 40 and 50 different enquiries from across the globe.

Observing the ECAs

Many of these projects will involve some form of export credit agency (ECA)-supported finance structure. ECGD, the UK ECA has been undergoing a period of rapid change since the publication of its mission and status review last year, and the decision to move towards a capitalised structure. This process has caused many aspects of export credit financing to be re-examined in the UK and within continental Europe. I would like to share with you some observations about the benefits of export credits, and some concerns about the ability of the ECAs to continue offering the level of service that is so important to the exporting success of its customers.

The relationship between a defence exporter and its government’s ECA is mutually beneficial.

By assisting in defence exports the ECA helps to maintain a national strategic partner that could not survive by supplying only its main domestic market. By spreading non-recurring costs over the larger production runs that result from successful exporting activity costs to the home government’s own defence ministry are reduced.

Providing export credit guarantees is a logical extension of the expression of foreign policy that defence sales represent. Government is involved in all defence exports through the export licensing process and defence sales are often conducted on a government-to-government basis.

From the perspective of the lending banks, export credit cover is an essential element in the financing of defence exports. Unlike their colleagues who finance commercial aircraft, trucks and rolling stock through a bewildering variety of complex leasing structures the defence lender’s options are relatively limited. Even if their shareholders consented they would be unwilling to take ownership risks in high value defence equipment. Following a customer default there is no mass secondary market for such equipment, even if it can be repossessed in the first place. The problems involved in repossessing a fully armed supersonic fighter are considerable, unless perhaps you already own a bigger one!

An exporter’s priority will always be its customers, and for them export credit holds many attractions. With the support of ECAs it is possible to structure attractive long term financing where repayments are delayed until after mean delivery, and which does not impact on the sovereign borrower’s banking lines. For customers requiring 100% financing the incentive provided to lenders by participation in the export credit should ensure a competitive commercial finance proposal for the percentage not covered by the ECA.

We view the continuing availability of such structures as being key to a successful defence export programme. Notwithstanding what are to us the unarguable benefits of ECA support for our business we remain concerned that these benefits should not in the future be diluted to the point where they cease to be of value. When comparing different ECAs across Europe it is interesting to observe the different approaches they take to their core purpose and objectives. We wholeheartedly agree with those who put promotion of exports at the top of their list.

One example of change in ECA support is associated with the FREF or fixed rate export finance regime. An attempt to radically revise the LASU provisions has had to be deferred for a year, and in the UK at least the CIRR product has in recent months lost much of its former flexibility. As a partner in many multi-sourced European projects we would like to avoid working within a fragmented European FREF framework where each agency does its own thing, but this would at least be preferable to finding that the European FREF rules had standardised around the lowest common denominator.

Disagreement with subsidies

An accusation sometimes levelled at ECAs is that they represent little more than a government subsidy and that such a subsidy is particularly inappropriate when applied to the defence sector. Looking around the European ECAs it is hard to substantiate this view. Under the FREF regime many agencies are able to manage their portfolios on a profitable basis. Export credit insurance can also be a positive contributor. In the last 10 years ECGD’s export credit insurance activities have contributed around £1 billion to the UK treasury. Contrast this with the billions of dollars available to certain countries particularly in the Middle East under the United States FMF programme. In many cases foreign military funding is effectively a grant, and it has to be spent with US companies.

Finally, I would like to quickly run you through the expectations that we have of our banking partners in the export finance business. Obviously the starting point is that they must have export credit capability and track record. To ensure the availability of 100% financing they must be prepared to offer sovereign lending in reasonable proportion to the amount of export credit available.

Specific experience in the customer’s territory is particularly valuable especially in campaigns in territories that are new to us.

We are facing ever increasing demands from our export customers for comprehensive industrial offset programmes involving inward investment and stimulation of trade in the buyer’s country’s domestic and export markets. There is a key role for exporting banks to play in this process using their local knowledge. I must stress that we do not expect our banks to behave like charities. In supporting our offset programmes the key point is that banks should look at their normal course of business in the territory and where appropriate direct projects towards us for inclusion under the offset umbrella.

Where buyers’ countries have their own active local banking sector it pays us to include them as members of the overall banking group so it helps if our international lenders already have contacts with their local equivalents.

Export credit is often seen mistakenly as a standardised product. In our experience this is not the case and lenders who are both experienced in using export finance and who have a clear understanding of specific customer requirements are often able to produce tailor-made solutions that provide us, the exporter, with a positive discriminator in our proposal.

Given the fact that virtually all defence business is transacted with sovereign buyers it is important to establish and exploit relationships with the key decision makers in the customers political hierarchy. This is a task not just for the exporter but also for its partner banks.

I would not like to end without referring to cost. There are very few mandates awarded without competition and all other things being equal, value for money will be a key factor.