4 A UK Export Finance UK Export Finance

1 Horse Guards Road London SW1A 2HQ

T +44 (0)20 7271 8000 F +44 (0)20 7271 8001

www.gov.uk/uk-export-finance

International Trade Committee 7 Millbank London SW1P 3JA

31 January 2019

Dear Committee members,

Supplementary Estimate Memorandum 2018-19

1. Overview

a) Introduction

The UK Export Finance (trading name of Export Credits Guarantee Department) Supplementary Estimate for 2018-19 seeks the necessary resources and cash to support the functions of the Department which include continuing functions in order to complement the private market by providing assistance to exporters and investors, principally in the form of insurance and guarantees to banks, but also direct lending to support exports.

The purpose of this memorandum is to provide the Select Committee with an explanation of how the changes sought in this Supplementary Estimate will be applied to achieve departmental objectives that align to the UK Export Finance Business Plan 2017-20.

2018-19 is the second year of UKEF's Business Plan for the period 2017-20. The plan outlines steps to increase the scale of support UKEF provides, become more customer-centric, and ensure support is relevant to both UK exporters and their UK supply chain.

Key objectives include:

• Increase the number of customers annually supported to 500 • Grow the value of support provided by financial products to £4bn • Retain the trust and confidence of HMT and Ministers by complying with financial objectives set

by HMT and the rules and regulations to which UKEF is subject • Increasing awareness, understanding and take-up of UKEF support among UK exporters,

suppliers and intermediaries through a marketing campaign to promote UKEF services as part of the GREAT campaign

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b) Spending controls

UKEF's spending controls cover net spending which is subject to limits set in Spending Reviews and which it can control. All DEL and AME amounts are Voted.

• Resource DEL - For UKEF this represents the administrative cost associated with running the department (known as Admin DEL).

• Capital DEL - For UKEF this normally represents IT hardware but can include software cost.

Annually Managed Expenditure (AME) covers net spending which is more difficult to control and forecast (and therefore which is set annually rather than for the Spending Review period):

• Resource AME- For UKEF this represents underwriting and export financing activities, including income received while supporting the exporters.

• Capital AME - For UKEF this represents lending activity (mostly Direct Lending Facility related).

c) Description of budget changes sought

The changes to provision sought are as follows:

Capital AME (Voted)- Section E

• An increase of £54m to reflect the increase in the funding requirement for direct lending loans in case$/£ foreign exchange rate fluctuation results in a weakening of the$ by more than 25%.

Resource AME (Voted) - Section E

• An increase of £31 m to reflect the increase in the funding requirement for direct lending loans in case $/£ foreign exchange rate fluctuation results in a weakening of the $ by more than 25%.

Summary of budgetary changes

Net Spending total Compared to original Movement compared

Amounts sought this budget year to outturn last year

year (Supplementary (Main Estimate 2018-19) (Outturn 2017-18)

Estimate 2018-19) £m £m £m £m

Resource DEL 1.3 1.3 - -0.5 1.8 Capital DEL 0.3 0.3 - 0.7 - 0.4

Resource AME 133.4 102.4 31.0 -4.6 138.0 Capital AME 725.4 671.4 54.0 167.7 557.7

Net Cash Requirement 363.6 363.6 - -56.6 420.2

Includes GREAT Marketing budget (RDEL Prog.) of £1.3m

Under the Direct Lending Facility UK Export Finance provides loans up to a cumulative maximum of £3 billion (total scheme limit announced Budget 2014) to overseas buyers to finance the purchase of capital goods and/or services, from exporters carrying on business in the UK. These loans can be made in Sterling, US Dollars, Euro or Japanese Yen, however to date loans have only been in US Dollars and Euro.

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The Autumn Budget in October 2018 provided a boost to exports by extending UK Export Finance's direct lending scheme by £1 billion in each of 2020-21 and 2021-22.

The increase of £31.0m to the Resource AME and of £54.0m to the Capital AME sought through this Supplementary Estimate reflects the following consideration:

• UKEF's portfolio is subject to foreign exchange movements as much of its activity is in currencies other than sterling. The increase is required to accommodate a potential increase in foreign exchange movements over the period of Jan-Mar 2019.

Historic Resource and Capital AME estimate changes are shown below:

Budget type Capital AME

Resource AME

2015/16 2016/17 2017/18 2018/19

Main Est, Voted Supp Main Est, Voted Supp Est, Main Est, Voted Supp Est, Main Est, Voted Supp Est, Change, Change, Change, Change, £m £m Est,£m £m £m £m £m £m £m £m £m £m

303.3 100.0 403.3 1,936.0 -1,000.0 936.0 1,289.0 ­ 764.0 525.0 671.3 54.0 725.3 32.5 - 32.5 164.0 o 44.0 120.0 85.0 63.0 148.0 102.3 31.0 133.3

d) Key drivers of spending changes since original budget this year

The net Resource DEL is unchanged from the original budget.

The net Resource AME and Capital AME have both been increased by £31.0m and £54.0m respectively. UKEF's portfolio is subject to foreign exchange movements as much of UKEF's activity is in currencies other than sterling. Both RAME and CAME change has been factored in to reflect a potential increase in foreign exchange (£/$) movements over the course of the next three months, as there is possibility that foreign exchange rate fluctuation will exceed the budgeted 15% and will reach 25%.

Foreign exchange movements:

• UKEF has a significant foreign currency exposure on its undertakings including amounts paid out on insurance and direct lending business, particularly in relation to US dollars

• UKEF is not permitted by HM Treasury to hedge its exposure to foreign currency movements

• Non-sterling direct lending presents UKEF with the increased foreign currency exposure with changes in the sterling value of direct loans resulting in foreign exchange rate movements

e) Spending and income trends

Graphs below capture the overall Resource DEL (admin costs) and Resource AME (income) trends for the past five years and plans presented in Estimates for 2018-19*:

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UKEF gross spending and income, £million

300.0

250.0

200.0

150.0

100.0

50.0

2014- 15 2015- 16 2016-17 2017-13 2018-19°

iross expenditure ejross income

f) Funding: Spending Review and Budgets

At the last Spending Review 2015 it was agreed with HM Treasury that all departmental ROEL (excl. depreciation) is from trading income so is zero on a net basis. For this reason, the voted net ROEL position is a token £1 k reflecting the fact UKEF covers its administration costs from the premium it charges for its products.

2. Spending (and income) detail

a) Ring fenced budgets

Within the totals, the following elements are ring fenced i.e. savings in these budgets may not be used to fund pressures on other budgets:

Resource DEL

Ring fenced budgets Compared to original budget Compared to outturn last year this year

Amounts sought this year (Outturn 2017-18)

(Supplementary Estimate (Main Estimate 2018-19)

2018-19) Change,£ m Change,% £m Change,%

depreciation I £0.3m* £0.3m +0% +£0.1 m* +200%

*rounded

3. Performance measures

UK Export Finance's business plan (see here) talks about high level objectives (see below for measures of performance) for the department's current financial year 2018-19:

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• Increase in the number of customers supported ­

Performance measure: number of customers supported

• Compliance with financial objectives set by HM Treasury-

Performance measure: maintaining the performance within the agreed financial parameters (Risk appetite, PRR, PAI)

• Increased awareness amongst the exporters ­

Performance measure: generate 5000 business leads, significantly improve the awareness of UKEF among the addressable market

4. Accounting Officer Approval

This memorandum has been prepared according to the requirements and guidance set out by HM Treasury and the House of Commons Scrutiny Unit, available on the Scrutiny Unit website.

As Departmental Accounting Officer I have approved the information included in this Estimates Memorandum.

Yours sincerely,

Louis Taylor

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