Abstract

One of the most common—and most difficult—problems that export credit agencies face is what to do about small exporters. And one of the most common complaints of these agencies is that they alone, unlike their private sector counterparts or even their opposite numbers in some other countries, face the political and other pressures to produce special facilities for this category of exporter.

One of the most common—and most difficult—problems that export credit agencies face is what to do about small exporters. And one of the most common complaints of these agencies is that they alone, unlike their private sector counterparts or even their opposite numbers in some other countries, face the political and other pressures to produce special facilities for this category of exporter.

The fact is that small companies and small exporters are a politically sensitive subject in most countries. Small business owners often wield considerable political power through their sheer numbers, and they face many actual and perceived disadvantages in exporting, relative to their larger competitors. But this does not necessarily or inevitably translate into a general imperative for export credit agencies to apply different underwriting approaches or charge lower premiums to small exporters than they do in other areas. Special facilities may indeed be appropriate for small exporters, but special facilities need not mean cheaper facilities—on the contrary, it may mean more expensive ones.

Facilities tailored to small exporters may be costly to operate largely because of diseconomies of scale: administrative costs per contract may be as high as those for larger exporters (or higher, because small exporters may need more agency advice and assistance), yet premium income per contract is likely to be lower. Lower-than-normal premium rates would obviously not cover these costs. It is one thing to develop special facilities and products for smaller exporters (or, more precisely, small companies that export), but it is quite a different thing consciously and deliberately to operate these facilities on a money-losing basis. The first is good, but the second is both dangerous and undesirable—not least from the point of view of smaller exporters themselves.

What Is Special About Small Exporters?

Export credit insurance is a difficult and technical subject, and for this reason the policy documents tend to be both complicated and lengthy. This is not normally a problem for large and experienced exporters. But small companies typically lack both experience and expertise in international trade and finance. Complex documents and labor-intensive procedures, therefore, not only cause “knowledge” problems for them but also strain their resources. In other words, smaller exporters will normally find the traditional export credit agency products difficult to understand and complicated and expensive to operate. They will also usually find it unattractive to try to fill these knowledge and resource gaps by buying in external expertise. Smaller exporters will, in addition, often face shortages of finance, including of working capital.

Thus, smaller exporters need not only simplicity of concept, approach, and documentation but also clear and easy administrative procedures. In addition, they may need greater help from the export credit agency both in setting up and operating the facilities and in exporting and obtaining finance generally.

A Temptation for Export Credit Agencies

Export credit agencies are often tempted to respond to these problems by devoting more resources to selling their standard products to small exporters and by charging them lower premium rates. Yet both reactions are certainly dangerous—indeed, they are almost certainly wrong.

Some export credit agencies have gone even further and have given priority to smaller exporters. But this puts their business with larger exporters at risk. This, too, is both dangerous and wrong, especially from the standpoint of delivering to smaller exporters the extent and quality of service they need. Export credit agencies need the business of large exporters to generate income to pay for the substantial infrastructure—credit information, specialized expertise, and the like—they need if they are to give comprehensive and efficient service to all their exporting customers, large and small. This kind of infrastructure cannot be derived from premium income from smaller exporters alone.

Premiums

Of course, given the choice, small exporters would prefer low premium rates over high rates. However, small companies are used to paying higher prices for their inputs than large companies do. For example, they generally pay higher prices for raw materials and components (which larger companies can buy in greater volume), higher interest rates on their bank loans, and higher premiums for their vehicle, premises, and other insurance. Why should credit insurance be any different? Moreover, it costs export credit agencies money and resources to develop and operate special facilities where the level of insured business per policy or policyholder is small, almost by definition. It would be misleading, dangerous, and hypocritical for agencies to pretend that they do not face a trade-off between, on the one hand, the emphasis, priority, and resources they devote to smaller exporters and, on the other hand, the premium income they will receive from this business.

Moreover, if the facilities extended to smaller exporters are deliberately treated as inevitable money losers (even if no claims are paid), these facilities will always be vulnerable to change, reduction, or withdrawal. They will be assigned a lower priority and less skilled staff, and as a result they will provide less customer care. It is simply not realistic to expect an export credit agency—given all the other problems, challenges, and competition such agencies now grapple with—to give top priority or devote its best resources (including skilled staff) to activities in which the more business is done, the greater the loss. In this as in most other areas, exporters get what they pay for.

Indeed, smaller exporters will get better products and service if they meet the full costs of their provision. And thus the guiding objective for export credit agencies and their governments should be to give priority to developing these special products and facilities thoughtfully and administering them effectively—and not to offering low or subsidized prices. Pretending to offer both at the same time is simply bogus and an unhelpful charade.

A Viable Approach

None of this is intended to imply that export credit agencies cannot help smaller exporters. Indeed, export credit agencies can play a central and positive role in helping small companies export profitably. The key, however, is that carefully defining the proper nature and scope of facilities for smaller exporters is more important than simply seeking to provide such facilities at the lowest cost.

Experience in a number of countries suggests that some of the most useful and relevant ideas for serving smaller exporters include the following:

  • Policy documents can be made shorter and written in plain language.

  • Administration, especially of business declarations and premium collection arrangements, can be streamlined. For example, small exporters could be charged a single premium when a policy or facility is issued. Then, at the end of the year, a reconciliation could be made against export business actually done.

  • Special facilities can be designed for the benefit of smaller exporters but issued to other, specialized institutions, which would then act as policy managers for these customers.

  • “Wholesale” policies or other facilities can be issued directly to banks, which would then retail them to the small exporters among their existing customers. This approach would also help link export credit insurance with other forms of financing.

  • Export credit agencies can provide a range of help and advisory facilities, such as help desks, as well as credit insurance. A fee could be charged if the advice verges into consultancy or is otherwise labor intensive.

  • Export credit agencies can provide training either directly to smaller exporters or to brokers who would then cater to such exporters.

  • Agencies can also train banks on the export insurance needs of smaller exporters and on the facilities that export credit agencies provide, to increase cooperation in these and associated areas.

  • Agencies can develop facilities or products that somehow associate credit insurance and working capital.

  • Agencies can cooperate more closely with national and local chambers of commerce, which in turn could act on behalf of smaller exporters in various ways.

  • Efforts can be made to link up insurance products with export support facilities and mechanisms available from the government of the exporting country to its exporters.

Small exporters are an important group. Handling their export business effectively is also important—and not only to export credit agencies. Blanket subsidies or low-cost facilities are unlikely to be effective. The business is best operated in the context of an agency’s total business, not least so as to take advantage of the infrastructure and information generated (and paid for) by the business of larger exporters. Export credit agencies also need to remember that some small exporters will someday become large exporters, and that viable approaches of the kind suggested here can help to increase the expertise and experience of the agency’s own staff.