We believed that Eximbank's involvement in loans to Japanese borrowers facilitated exports, but the question of whether all loans were necessary to insure U.S. sales was unresolved. The difficulty in measuring the effect on exports of Eximbank's activities and the fact that it is a Federal Government entity accountable for its actions argue strongly for clear documentation of the basis on which loans were made and the reasons Eximbank participated to the extent it did. This documentation can be accomplished without creating a large administrative workload or unduly delaying loan applications. More importantly, this kind of management discipline would provide Eximbank with greater assurance that its assistance was being applied to transactions most likely to benefit the United States.

ESSENTIALITY OF EXIMBANK FINANCING

We know of no system that can be devised to absolutely insure that regular commercial financing is not displaced or that the availability of concessional financing is the crucial factor influencing the sale. It is possible, however, for Eximbank to develop a system for acquiring information which will increase the probability of its assistance resulting in increased exports. In developing a system, a fundamental issue is how much evidence is needed to judge whether concessional financing is necessary to complete a sale and that prospective borrowers are not trying to take advantage of the attractive rate and terms available and how much risk to take on losing a sale.

One school of thought holds that if there is any possibility of losing a sale, financing should be made available. Under such circumstances, there is little need for an information system that is susceptible to developing differing viewpoints. On the other hand, other Federal agencies have faced similar judgments in programs involving concessional financing and have developed more complete criteria for deciding on the merits of each application.

The system developed by the U.S. Department of Agriculture for determining that additional exports of agricultural commodities are made through barter transactions under the Agricultural Trade Development and Assistance Act of 1954 is shown as appendix IV. To comply with the stipulation that the Secretary of Agriculture take reasonable precautions to avoid disruption of world prices or displacement of cash sales for dollars (to insure that additional exports of agricultural commodities are made), Agriculture was guided by

-- the foreign exchange position of prospective importing countries, their recent status as cash markets, and U.S. prices and other conditions of sale of agricultural products relative to those of other suppliers; and

--broad guidelines which, while permitting an operable program, guard against displacement of U.S. cash agricultural exports.

We recognize that agricultural commodities and the industrial goods financed by Eximbank are dissimilar and possibly require consideration of different factors. Nevertheless, Agriculture's development of a system to determine additionality illustrates that a system can be devised which will increase the probability of Eximbank's assistance resulting in increased exports.

Factors in essentiality determinations

Eximbank acknowledges the need for criteria on loans under its Export Expansion Facility program. The Facility program was authorized by the Congress in 1968 to facilitate export transactions which offered a greater repayment risk than usual. Loans under the Facility program are made if the transaction is in the country's long-term interest, judged on one or more of the following conditions.

1. The transaction offers opportunities for developing markets for U.S. goods and services.

2. The transaction could lead to continuing sales.

3. Significant followup sales of equipment, spare parts, etc., will likely occur.

4. The transaction will preempt the sale by foreign
competitors trying to buy into the market.

5. The transaction is necessary to maintain presence in the market.

These conditions could be appropriate when considering any loan. We believe, however, that other specific and directly relevant factors should be considered and made a matter of record. These include the (1) demand and supply conditions for the goods being financed, (2) relative advantages or disadvantages of U.S. suppliers, and (3) availability of private financing.

The alternate FRB member of the NAC, stating his views on assessing the need for financing in a letter dated October 24, 1969, to Eximbank's President, said:

"*** there is no disagreement between us on the
importance of using our finite financial re-
sources with the greatest possible efficiency.
*** It is a particularly complex problem for
your Bank since the maintenance of your lending
rate at a level far below rates charged by pri-
vate lenders denies you the use of a very im-
portant tool in the allocation of your loans.
You know better than I do the attractiveness
of your lending rate to all types of would-be
borrowers. This is a problem the Bank has
faced for over three years, and we have reg-
ularly urged that a more flexible interest
rate policy be adopted in order to ease the
burden on the Bank management of having to
decide whether the applicant was seeking credit
because it was really essential to making the
export or because he was attracted by the low
interest rate."

*

*

*

*

*

"We have taken the position that it would be
desirable to take greater care to evaluate the

competitive position of the goods being financed
with a view to determining whether or not pre-
ferential financing, using up the limited re-
sources of the Export-Import Bank, was really
required. We have suggested that where the evi-
dence clearly indicated that such financing was
not necessary, it would be better for the Bank
to divert its resources to assisting other ex-
ports which could more clearly benefit from the
Export-Import Bank credit. *** I would hope
that it might be possible for this point to be
given consideration in the loan papers in much
the same way that the papers give consideration
to questions about the creditworthiness of the
borrower and the economic and technical sound-
ness of the project being financed. *** You
correctly ask for the data that underlie these
judgments. It seems to me that you legitimately
can ask that the staff provide you with similar
supporting evidence that the extension of the
credit is essential to the sale. The evidence
may not in all cases be everything desired, but
the mere fact that the staff is expected to ex-
plore this issue with some care should produce
some beneficial results in giving you and your
Board a better basis for making the difficult
decisions confronting you."

Although the foregoing suggestions appeared to merit serious consideration, no substantial change was made in the material presented to NAC on subsequent loans.

Value of Embassy participation

Although Embassies are regularly requested to comment on proposed Eximbank loans, their comments, in line with Eximbank expectations, are limited to broad political or economic objections, and their potential for assisting Eximbank on loan decisions is not realized. For example, some Embassy officials in Tokyo, although fully supporting the U.S. export drive, expressed reservations on the need for certain loans, citing the imbalance in United StatesJapan trade. Some Embassy officials considered that Japan was capable of and should be encouraged to finance more of

its imports and that such financing would achieve more positive U.S. balance-of-payments effects for existing and future U.S. exports to Japan.

Eximbank advised the Embassy in April 1970 that, although it encouraged and intended to respond to views of overseas posts, information submitted should be limited to matters of true importance, such as whether equipment might go into unfriendly hands or other adverse information.

An Embassy official advised us that the Embassy could not and should not be involved in deciding whether loans should be made. The Embassy was willing to assist Eximbank and possibly provide more meaningful information, but they stressed that operating decisions belonged to Eximbank. We agree, but this should not preclude the Embassy from reporting factors considered pertinent to the decisionmaking proc

ess.

In 1971 Embassy officials commented that Japan had made significant strides in increasing its foreign exchange position and that Eximbank financing might no longer be needed to the extent it had been in the past. Other comments indicating the kind of advice and assistance the Embassy could give Eximbank were:

--Japan's import-financing procedures include a government approval system which insures foreign exchange for authorized imports. The Embassy could advise Eximbank on current domestic credit policies and the credit standing of prospective borrowers. However, Eximbank had never asked the Embassy if local financing was available.

--Initial purchases of U.S. wide-bodied jets probably would have been made without Eximbank participation for reasons of prestige and to compete with other airlines; subsequent purchases, however, might have been postponed without Eximbank financing.

--Contacts by Embassy officials indicated that some sales. would have been made even without Eximbank financing. The Embassy could make other selected followups as part of a system for determining the effectiveness of Eximbank's programs.