Can the private sector replace Ex-Im Bank in developing economies?

By Molly Anders 22 May 2015

A joint hearing on the Ex-Im Bank on April 15. The bank’s authorization expires June 30. Photo by: U.S. Rep. Jim Jordan’s Flickr page

In a world without the U.S. Export-Import Bank, the private sector reigns.

In the run-up to the June 30 deadline, Congress is debating whether to reauthorize the Ex-Im Bank, a trade promotion agency extending financial benefits to U.S. businesses that would not otherwise qualify to export or invest overseas.

Members of Congress who hope to reauthorize the bank point to the $7 billion Ex-Im has returned to the U.S. treasury over the past two decades, according to the U.S. Government Accountability Office, while opponents insist Ex-Im’s work could be done just as easily by the handful of other existing trade agencies, or by the increasingly robust U.S. private sector.

Anything Ex-Im can do, private banks and lenders can do better, went the refrain of Republican Reps. Ted Poe and Jeb Hensarling at a hearing in the run-up to Ex-Im’s reauthorization. House Speaker John Boehner said Thursday that if the Senate sends the House a reauthorization, he would hold an open-amendment floor vote, giving House opponents the chance to end, scale back or reform the bank.

But when it comes to growing business in developing markets through foreign-direct investment — Ex-Im financed $27 billion in U.S. exports in 2013, mostly to developing countries — experts and thought leaders in the aid community aren’t sure anyone, but especially the private sector, can fill Ex-Im’s shoes.

“When countries build things together, they create lasting bonds that serve national interests and improve the global economy,” Fred Hochberg, president and chairman of the Ex-Im Bank told congressional members at a hearing in Washington, D.C., Wednesday.

Supporters of Ex-Im claim commercial banks can’t similarly bolster financial growth because they are driven by profit margins, rather than foreign policy goals to invest in developing markets, like those in sub-Saharan Africa and the Asia-Pacific region.

“Because of the perceived risk and difficulty of working in sub-Saharan Africa, Ex-Im is the difference between U.S. companies investing there and investing somewhere else,” Zenia Lewis, a U.S.-Africa trade and investment specialist at the African Development Bank, told Devex.

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Because Ex-Im’s financing aligns with U.S. trade goals, for those in the aid industry, private sector financing would mean a disconnect between U.S. businesses and U.S. trade incentives, possibly limiting the benefits of programs like the African Growth and Opportunity Act — or AGOA — and Power Africa.

“It would be highly unlikely that the private sector could step in and suddenly fill the role of working with agencies dedicated to broader African development priorities and provide financing that supports those kinds of goals like Ex-Im does,” Lewis said.

And even if private banks adopted similar mandates and agreed to shoulder more risk, Lewis explained, they lack the same familiarity with host-country governments, partners and regulations.

Ex-Im offers U.S. businesses “ready-made channels for working in emerging markets,” Tony Fratto, partner at Hamilton Place Strategies and former press secretary to George W. Bush, told Devex.

“If a company in Tennessee gets a call from a potential customer in Angola, they face a lot of barriers before they can actually reach those new customers,” Fratto said.

And where the U.S. bows out of projects in the developing world, other countries that subsidize international private investment can step in.

What commercial banks can’t do, other countries can do better

With or without Ex-Im, foreign-direct investment from China, Brazil, India and Russia is growing. This group of countries presents an alternative — and a challenge — to Western-led development agencies and donors.

According to data compiled by Ex-Im, the 34 members of the Organization of Economic Cooperation and Development provided $97.9 billion in medium- to long-term financing to developing countries in 2013, down 22 percent from 2012. Of this amount, Ex-Im financing totaled $14.5 billion. By comparison, China, Brazil, India and Russia provided $55.4 billion, up more than 10 percent from 2012. China alone accounted for at least $45 billion in 2013, and is currently the leading financier for infrastructure and transportation investments in Africa.

In some cases, Ex-Im’s absence would threaten U.S. involvement in projects currently underway, supporters of the bank say. For a current water project in Cameroon managed by General Electric and the Environmental Chemical Corp., the companies would be forced to forfeit the project to the next highest bidder, in this case a firm subsidized by a Chinese export credit agency. The threat of Ex-Im’s demise — coupled with China’s flexible, competitive lending terms — has already led to delays in the project.

A post-Ex-Im world

Those critics who acknowledge Ex-Im’s importance as a fail-safe claim the problem isn’t really Ex-Im, but the overlap between Ex-Im and other U.S. trade agencies that finance U.S. exports, like the U.S. Department of Agriculture, the Small Business Administration and, with a more development-driven mandate, the Overseas Private Investment Corp.

“[Other industrialized nations] have only one or two agencies giving benefits,” Republican Rep. Dana Rohrbacher pointed out at Wednesday’s hearing. “With so many such agencies operating within the U.S., how many do we really need?”

The U.S. administration doesn’t completely disagree. President Barack Obama floated the idea of a “U.S. development finance agency,” which would consolidate the functions of similar U.S. agencies in his fiscal year 2016 budget request. Other proposals include the creation of a “one-stop-shop” to streamline operations and partnerships. 

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But, Fratto told Devex, the agencies operate as is for a reason.

“The mandates of OPIC and Ex-Im co-exist to advance strong, sustainable foreign direct investment,” Fratto told Devex.

Officials from OPIC, which endured and won a similar reauthorization battle last year, insist the agencies are different, and that the urge to cut or combine investment agencies is the result of a “government agency [public relations] problem.”

“It’s only around this time that people are paying attention enough to learn the differences, and often they only understand far enough to try and cut someone’s funding,” Fratto said.

Budget season, he explained, “gets people trigger-happy.”

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About the author

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Molly Andersmollyanders_dev

Molly is a global development reporter for Devex. Based in London, she covers U.K. foreign aid and trends in international development. She draws on her experience covering aid legislation and the USAID implementer community in Washington, D.C., as well as her time as a Fulbright Fellow and development practitioner in the Middle East to develop stories with insider analysis.


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