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goodwill and possible stimulation of foreign competition if Eximbank credit is not made available.
Minutes of the meetings of the NAC staff committee record the votes of member agencies and brief statements of the decisions reached. The minutes do not contain many details of contrary opinions or the merits of loans under consideration. FRB representatives have cast a number of negative votes on Eximbank loan proposals. Although State, Commerce, and Treasury representatives have expressed concern over the necessity and desirability of a number of Eximbank loans to Japanese borrowers, they have not cast negative votes.
FRB supports Eximbank's role as a lender of last resort but has opposed loans which, in its judgment, were not essential to obtain export sales. In particular, FRB has questioned the necessity of Eximbank financing of items for which it felt there was slight competition and for which the buyer could have obtained financing from other sources.
In implementing the capital loan program, Eximbank management is responsible for deciding which cases require its assistance. Importers, in seeking financing, naturally try to obtain the most attractive rates and terms. Exporters, on the other hand, would rather receive cash immediately than carry a receivable on their books. Eximbank management must contend with these normal business interests by devising ways to obtain data to objectively assess the merits of these representations.
We recognize that decisions on loan applications will always require some subjective judgments because certain questions cannot be answered in any truly scientific manner. For example, what are the relative weights applied to the variety of considerations in determining whether Eximbank financing is necessary to consummate the sale? Does the need to increase exports justify extending credit rather than risking the loss of sales?
On a scale of probabilities the United States would likely have its greatest competitive advantage in
high-technology, capital-intensive items. Conversely, it would likely have the least advantage in low-technology, labor-intensive products. Concerning a country's ability to finance purchases, the foreign exchange position of the importing country would be an important indicator as to whether Eximbank financing was essential to consummating a sale. Yet, Eximbank has considered it necessary to extensively finance exports in which the United States is most competitive to countries rich in foreign exchange, such as Japan. In view of the favorable competitive situation in Japan, additional benefits might accrue to the U.S. trade and balanceof-payments positions if more Eximbank resources were applied to commodities and/or countries where the United States is less competitive in export sales.
Although a liberal Eximbank financing policy may induce business to be more aggressive in seeking export opportunities, selectivity is still important because Eximbank financing can displace cash sales and sales that would have been financed from other sources, particularly off-shore sources. In these cases, the immediate cash flow to alleviate the U.S. balance-of-payments position might be delayed because it would be spread over the lengthy repayment period of the loan. If, for example, only 10 percent of the approximate $1.6 billion in 1971 loan authorizations displaced cash exports, $160 million in cash flow would be delayed.
Another important consideration for selectivity in Eximbank loans is the grant element involved when Eximbank provides credit at lower interest rates than would have otherwise been paid. The grant element represents a transfer of real income to the foreign borrower and/or the exporter, depending on the terms of the sales transaction. The grant element can be substantial in large long-term loans.
We considered that U.S. corporate bond rates would be appropriate for comparing relative costs to the borrower with Eximbank's lending rates, on the basis that they reasonably reflect the cost of raising funds in the United States. Other rates, such as foreign country borrowing rates, might also be appropriate from the borrowers'
viewpoint. Since 1965 U.S. corporate bond interest rates have risen, reaching a high of 9.4 percent during the second half of 1970. During this same period Eximbank's interest rate rose only from 5.5 to 6 percent in the last quarter of 1966 and has been maintained at the latter rate since that time. Since 1965 then, Eximbank's interest rate on capital loans has been well below what may be considered the U.S. market rate for comparable loans, and for part of the period covered in our review it was also below the cost of some U.S. Treasury borrowings.
To illustrate the grant element, we calculated the transfer of real income to the Japanese borrower and/or the seller on a $27 million loan approved in June 1970 for the purchase of two thermal power plants. The 6-percent interest on the outstanding balance of the loan is to be repaid during the second half of 30 scheduled semiannual installment payments. Since a precise calculation of the grant element is not possible because of changing interest rates, the table below shows the grant element involved at various comparable market rates
Comparable market rate
Grant element (note a)
Percent to loan
7 8 9 10
7.6 14.2 19.9 24.8
a The grant element in Eximbank's 6-percent rate was computed by subtracting each 6-percent interest payment from the payment that would have been made in the same period had each of the above market rates been charged then discounting each difference at that market rate. The differences were discounted since the payments are to be made in the future, and the value of the differences would have been overstated had they not been discounted.
Because of the significant amounts involved, management should carefully evaluate the essentiality of loans, especially to borrowers in Japan where the need would not appear to be as great as in other countries of the world.
Eximbank states that it has not refused a loan for lack of funds, but, to create an immediate cash flow to benefit the U.S. balance-of-payments position and to raise operational funds, it has sold its debentures and loans in the public market. Debentures carried interest rates greater than Eximbank's current lending rate, while loans were sometimes sold at a discount. Although we did not obtain information on the cost associated with sales of debentures, we noted that in 1970 and 1971 Eximbank sold $674.8 million in loans at a discount of $12.6 million. In testimony before the Congress in May 1971, Eximbank, in seeking to be relieved from Federal budgetary restrictions, described the practice of selling Eximbank assets to finance its lending thusly:
"This synthetic sales procedure is overly compli-
Loans are not consistently sold at a discount, but these sales illustrate that during periods of high interest there can be added costs associated with Eximbank operations.
Eximbank is able to raise funds in this manner and yet operate at a profit and make a $50 million dividend payment to the Treasury each year by its use of $1 billion in initial capital provided by the Treasury and of $1.3 billion, at June 30, 1971, of interest-free reserves built up over
IMPROVED MANAGEMENT INFORMATION SYSTEM NEEDED
An improved management information system would assist Eximbank management in determining whether its financial assistance is essential to an export sale, in selecting products most in need of its financial assistance, in documenting the basis of its actions, and in evaluating the effects of its financing on exports.
A CASE STUDY OF JAPAN
To evaluate Eximbank's system for determining the need for its financing, we examined 26 loans totaling $386.9 million authorized to borrowers in Japan. We discussed Eximbank financing with officials of the American Embassy, interviewed selected borrowers, and met with Japanese Government officials. The results of this study, agency comments on our observations and conclusions, and our evaluation thereof are presented as appendix II.
Attempts to evaluate Eximbank efforts to maximize private sources of financing were hampered by lack of documentary evidence. The records showed that loan approvals were primarily based on economic viability. Little documentation was found concerning assessments of such factors as price, delivery, or competition. Although Eximbank participation might have been necessary to consummate sales, we could not establish that Eximbank had made a concerted effort to maximize private financing in these transactions.
Eximbank participation in some export transactions was questionable, based on information from Japanese borrowers and government officials and examination of records at the Embassy in Tokyo. Information to resolve these questions was not available in Eximbank loan files. Specifically, Eximbank financing seemed unnecessary for four loans totaling $10.1 million. Prestige, patented materials, the compatibility of U.S. equipment, and a stated preference for U.S. products by borrowers suggested that purchases would have been made from the United States without Eximbank assistance.