Jul 11, 2014 - 3:00pm

When Ex-Im Is Required (Megaproject Edition)


Former Executive Director, International Policy

Sadara_Chemical_Company_Construction_800px.jpg

Sadara Chemical Company complex under construction in Saudi Arabia.
Sadara Chemical Company complex under construction in Saudi Arabia. Source: Sadara Chemical Company.


In a blog today, majority staff at the House Financial Services Committee attacked the role of the U.S. Export-Import Bank (Ex-Im) in a project that supported nearly 20,000 American jobs at no cost to the taxpayer.

What’s going on here?

Given that more than 99% of the U.S. Chamber’s members are small businesses, we’ve continually emphasized the vital role Ex-Im plays in supporting small firms’ exports. In fact, small businesses account for nearly 90 percent of Ex-Im’s transactions.

Of course, many large companies also use Ex-Im’s services, and when they do—especially for pricey, long-lived capital goods such as aircraft, turbines, locomotives, and nuclear reactors—the dollar amounts involved are large. But so are the numbers of jobs such exports support.

Some critics have suggested Ex-Im should “reformed” to phase out its support for big companies and big projects.

This is a terrible idea. Just as with small businesses, when it comes to megaprojects and expensive capital goods, Ex-Im isn’t just nice to have—it’s often indispensable.

Matthew Ekberg, Vice President for International Policy at the Bankers Association for Finance and Trade (BAFT), explains:

On longer term, large foreign project financing deals, when a project is put out for bid or for an RFP, it is standard practice that the bid must include financing or guarantees from an official export credit agency (ECA) such as Ex-Im. If ECA financing is unavailable, the company is excluded from the bid.

Let’s say that again: For U.S. companies even to bid on many big foreign projects, Ex-Im support is required.

Consider the real world megaproject named by the House Financial Services Committee blog today. Sadara Chemical Company will be the largest integrated petrochemical complex ever built in a single phase when all units are up and running in 2016. Like other modern industries such as aircraft manufacturing and nuclear power, vast scale is key to Sadara’s economics.

Sadara’s $12.5 billion in project financing set a record for the petrochemicals sector. Funds came from diversified sources: international and local commercial banks, Islamic financial institutions, a $2 billion sukuk (Islamic bond) issuance, and seven export credit agencies, including Ex-Im.

The Ex-Im loan provided support for $3.8 billion in U.S. exports used in the project, including power transformers, electrical heaters, grounding monitor panels, junction boxes, cable trays, and more. Manufacturing these goods was an army of nearly 20,000 American workers with more than 80 U.S.-based companies, including 20 small businesses.

Why can’t financing for huge projects such as Sadara be left entirely to the private sector? As noted above, bids often require support from an export credit agency such as Ex-Im.

As BAFT’s Ekberg reiterates:

This requirement for ECA support is standard on all long-term projects, and a regular part of medium-term financing. As such, if Ex-Im isn’t reauthorized, U.S. companies would be shut out of whole classes of potentially lucrative opportunities.

Other regulatory constraints make Ex-Im necessary as well. Commercial banks are willing and able to fund a substantial portion of these megadeals, but regulations require each to limit its exposure to a given sector or country (just as Ex-Im does), which can lead to financing gaps on megaprojects.

As the Bankers Association for Finance and Trade (BAFT) and the Financial Services Roundtable explain in a recent white paper, the regulations and rules covering commercial banks

do not always address certain types of export finance-related intangibles which can reduce the ability of an institution to provide support for trade transactions relative to other types of bank loans. Without Ex-Im support to mitigate these constraints, financing of some export deals would not be possible, resulting in lost sales for clients…

As contracts are often awarded to exporters offering the most favorable terms, Ex-Im provides lenders a guarantee or insurance support which enables them to extend the financing needed for the U.S. exporter to win against global competition, thus filling a gap the private markets are unable to fully support.

It’s worth remembering that Ex-Im provides no subsidy—none—to the companies involved in big projects: It doesn’t cost the taxpayer a dime. In fact, Ex-Im charges fees that last year allowed it to return more than $1 billion to the U.S. Treasury after covering all its expenses.

Small can be beautiful, but big can be, too. For American business to remain competitive on the global stage—and on a global scale—reauthorization of the Ex-Im Bank is imperative.

About the Author

About the Author

Former Executive Director, International Policy

Christopher W. Wenk is the former executive director of international policy at the U.S. Chamber of Commerce.