It has been a year of change at the UK's Export Credit Guarantee Department (ECGD). The agency has undergone a far-reaching reorganisation, addressing both the way in which applications for cover are considered and the flexibility that the agency has to act upon its own judgement in considering these cases. As a result, the department now operates as a capitalised fund with far more flexible constraints on cover than was previously the case.

The year kicked off on a high note with the signing of a co-operation agreement between the department and US Ex-Im Bank, the latest in a string of co-operation agreements between the UK agency and its counterparts ? but the first such agreement between US Ex-Im Bank and the export credit agency of another country. This deal brings the tally of co-operation agreements signed by ECGD to 23 ? 14 of which include reinsurance provisions.

In addition to this landmark agreement, ECGD has been at the forefront of other initiatives, several of which concentrate on the less attractive markets in which it operates. At the end of July, ECGD spearheaded a new international agreement to ensure that projects in the 41 poorest nations are concentrated on ? those that will provide social and economic benefits. Under this OECD Statement of Principles, ECAs will only support projects in heavily-indebted poor countries (HIPCs) that are consistent with poverty reduction strategies ? a policy that ECGD itself has adopted since 1997. Another innovation that ECGD has developed to tackle its more challenging markets is the ?Good Projects in Difficult Markets? initiative. This has been launched to make it easier for exporters to do business in markets where normal cover is either unavailable or insufficient. The scheme aims to particularly focus on oil and gas projects and on foreign currency-generating schemes. The most high-profile project undertaken so far under this scheme is the Blue Stream, the $3.2 billion project to construct a 760km gas pipeline from Russia to Turkey. The project is being sponsored by Gazprom and Italian gas supply and transmission company Snam. It is the first cover that ECGD has supplied for Russia since 1998 ? the first drawdown of which took place in March this year.

But it has not been all plain sailing. ECGD has attracted widespread negative publicity in the UK for its involvement in the Ilisu dam project in Turkey which could entail the displacement of 15,000 people. The project has attracted a chorus of protest in the UK media and has raised the important issue of how ECAs manage their domestic image ? an important issue given that they are spending taxpayers' money. But dealflow at ECGD has continued apace, with the agency signing new cover so far this year in markets as diverse as Iran, Azerbaijan, Bangladesh and Jamaica. Project Finance spoke to the project finance team at ECGD about the year's developments.

PF: Have any significant changes been implemented in the project finance team during 2001? The Mission and Status review published in July recommended the introduction of a capital framework for managing risk and a virtual system is now up and running that will ?go live? in April 2002. What change will this bring to the decision-making process for supporting project finance transactions?

ECGD: The main organisational change to have occurred during 2001 is the conversion of ECGD's Underwriting Group into the customer-focussed Business Group. This change means that the whole of a customer's business, in whichever country it may be transacted, will be dealt with by the same business team. Under the previous arrangements, ECGD's underwriting teams were organised on a geographical basis and a customer would find that his business would be handled by a number of teams, depending on where it was taking place in the world.

This organisational change is driven by the need, in the wake of the capitalisation of ECGD, to give a more commercial edge to ECGD's operations. The main change in the decision making process under capitalisation will be that decisions on individual applications will be taken in the context of their impact on the portfolio as a whole and will be less constrained by limits on the amount of cover available for individual countries. Also, as a capitalised Trading Fund, ECGD will have greater autonomy within Government to take decisions on individual cases.

PF: What impact do you think that the terrorist attacks in the US will have on the role of ECAs in project finance? Can any parallels be drawn with the aftermath of the Gulf War? Do you expect ECA support to be sought in future for projects that might no have needed it prior to September?

ECGD: It is still too early to say. It is not unusual, because of the volatility of the financial markets, for the official export credit agencies to be more in demand as a source of funds at times of economic downturn or crisis.

PF: How has the cooperation agreement signed with US Ex-Im Bank in January affected the progress of transactions in which you are involved? Is the One Stop Shop initiative having the impact that you hoped it would?

ECGD: We have already received some expressions of interest regarding the agreement signed with US Ex-Im Bank in January ? the first ever to be signed by the American ECA

The one-stop-shop initiative has been one of our most successful schemes, and we trust that this new agreement will prove similarly productive. The scheme helps UK exporters work together with their overseas counterparts by streamlining the bidding process. We have supported 38 deals with an overall contract value of approximately £7 billion.

PF: The OECD premium agreement has resulted in convergence of premiums for sovereign risk between the ECAs. Is a similar process now underway for corporate risk? What are the problems inherent in this?

ECGD: It is generally agreed that it would not be practical to harmonise buyer risk pricing in the way that sovereign/ country risk has been harmonised under the OECD premium agreement. However, the OECD is engaging in an ongoing exercise to achieve greater transparency on buyer risk evaluation and pricing practices. Currently, the focus is to determine how and why pricing for similar risk can vary.

PF: How much progress has been made with your local currency and structured finance or ?Good Projects in Difficult Markets? schemes? Apart from Blue Stream, which other projects are being considered under these schemes?

ECGD: ECGD is continuing to actively promote support for export credit loans denominated in local currency. Having previously set up local currency facilities to support UK exports into Hong Kong, Singapore and Malaysia, we have been looking closely at a number of other markets.

Thailand has provided a particular marketing focus in recent months, raising the possibility of our first ever Baht financing to back the sale of UK equipment into the country. Such a deal would remove the worry for Thai firms about exchange risks and the costs associated with managing exposure to financing in a foreign currency.

We have also promoted our local currency financing facilities in India, Mexico, the Czech Republic, Poland and Egypt ? and have also discussed Rand financing in South Africa, where new business is now under consideration.

A number of structured deals in high-risk markets are currently under consideration as structured finance or ?Good Projects? in markets such as Nigeria, Russia, and Angola.

PF: Has the new focus this year of projects in HIPCs on social and economic benefits had any impact on your business? Are there any deals you were considering that you will now not?

ECGD: Debt sustainability is a prime determinant of the provision of ECGD's support for exports to developing countries. In the past, some export credit lending may have contributed to the build-up of unsustainable debt in some of the poorest countries.

The aim of the ?productive expenditure? screening process is to ensure that activities supported by export credits contribute to sustainable economic and social development in poor countries; and do not contribute to the contribution of unsustainable debt burdens.

This process has had a beneficial impact on ECGD's business as, following delivery of debt forgiveness it has enabled us to look creatively at backing sustainable projects, which would previously have been impossible, whilst also helping these countries get back on the road to economic recovery.

PF: You have considerable exposure to the Middle East and last year resumed coverage in Iran. Have recent developments in Pakistan and Afghanistan caused you to address your exposure to the region? Will you be liaising with other ECAs over coverage in the area if the situation deteriorates?

ECGD: The risk environment in this region has clearly been affected by recent events.

Against this background, ECGD is closely monitoring developments, and keeping its cover position under constant review. We cannot speak for other ECAs, but in relation to the countries you name, we are off-cover and have no exposure for Afghanistan, which is also subject to UN sanctions. We have also been off-cover for Pakistan since it encountered financial difficulties a number of years ago.

PF: Your involvement in the Ilisu and Yusefeli dam projects has generated very negative press coverage in the UK. What have you learned about delivering your message to the public from this experience and how important is it for the ECGD to maintain a positive image back home? Has the OECD common agreement on environmental risk that ECGD signed up to in April 2001 slowed deals down as some exporters feared?

ECGD: It is important for ECGD to maintain a positive image, and we obviously wish to do all we can to further this ? but our role is to support the export of UK goods and services whilst operating within the ethical framework set out in our Business Principles.

We remain determined to be open about our business. Much of the negative press coverage on ECGD's involvement with Ilisu has been inaccurate and sensational ? very much a case of: ?Don't let the facts get in the way of a good story.?

We have made it clear from the beginning that no ECGD support would be provided for the project unless important environmental and social issues were being addressed. This remains our position.

The agreement signed in April relates to the Statement of Principles on Productive Expenditure (see above). Negotiations on the OECD Agreement on Common Approaches to the Environment are still on-going, but ECGD has been operating its own environmental assessment system since January 2000. This was enhanced in December 2000 to meet the requirements of our Statement of Business Principles. We are confident that our current system is in line with the anticipated requirements of the OECD agreement.

To date, the environmental assessment does not seem to be slowing deals. During the first nine months of 2001, we have been able to process more indications through our new risk management system and project impact questionnaire than in the whole of last year. Most exporters recognise that environmental protection is now an essential consideration for all successful businesses and are happy to work with ECGD to identify and minimise environmental impacts.

PF: Have your plans to re-focus on industries such as oil, gas and civil engineering been implemented?

ECGD: Yes. We have now implemented a re-organisation programme in order to enhance customer focus, and increase our sectoral knowledge in areas such as oil, gas, water projects, civil engineering and aircraft. Building on and extending our existing market knowledge in this way should help us more actively respond to the needs of UK exporters.