EEIP has delivered a Regulatory Impact Analysis (RIA) of the proposed change in legislation related to the increase of the financial sources of the Export Guarantee and Insurance Corporation (EGAP). EEIP’s report analyzes the advantages and disadvantages for the Czech economy stemming from EGAP’s export support through export insurance.
The RIA serves as support material to the decision making in increasing the financial allocation for EGAP. The allocation is to enhance EGAP’s insurance funds. Increasing these insurance funds allows expanding the insurance capacity of EGAP and thus enlarging the support of the Czech export (in accordance with OECD’s rules and agreements).
EGAP is a key organization in the Czech export policy, as it allows companies, through insurance and guarantees, to gain financing for its export activities. EGAP creates a framework that enables exporting goods, especially for large companies (e.g. large technological units). EGAP enables companies to have acceptable financing conditions for exporting into risky countries and for long term projects. The financing itself is then provided by commercial banks and the Czech Export Bank. Optionally, companies use their own funds to support such activities.
The general take away points stemming from the models used in the RIA are:
- There is a consensus that EGAP does positively influence the Czech economy and the public budget. This conclusion is supported by the econometric models analyzing EGAP’S impact on export and the public budget.
- EGAP’s contribution is proved by the following model outputs: An additional CZK 1 bn in EGAP‘s regulatory capital would generate over a period of ten years the following benefits:
– A cumulated benefit (net present value)of CZK 1,682 mil to the public budget via taxes (accounting for the basic scenario)
– An annual average number of 1,743 jobs (excl. baseline scenario)
- EGAP’s budgeting from the point of view of the ECA (Export Credit Agency according to the OECD consensus) is stable. Therefore the lack of resources stems from the limits on the regulatory capital.
- According to historical data, the financial resources injected into EGAP’s regulatory capital will most likely not be used to pay out insurance filling. Therefore the costs for the state administration will consist solely of opportunity costs – CZK 200 – 400 mil over 10 years. Thus the benefits from EGAP’s activities exceed 4 – 8 times the costs of injecting an additional CZK 1 bn.
- The model analyzing EGAP’s impact on the export of the Czech Republic shows that CZK 1 of supported export generates CZK 0.312 of real average increase in export, about twice as much than a similar model resulted in Germany.
- The econometric model shows that it is beneficial to include the commercial banks into supporting export (e.g. in the form of club financing, syndicating the Czech Export Banks on the secondary market; it is crucial not to overlap the public support of financing and insuring).
- Finally, the sustainability model results show that if Czech exporters will be capable to obtain larger orders, then EGAP will need more resources from the state budget to reflect such demand. EGAP has only limited means to influence its portfolio, its activity directly reflects the demand of customers
Active search of co-insurance and reassurance from foreign ECAs on foreign sub supplies is a means to face the issues of rising demand of insurance. This business model is suitable vice versa as well, when EGAP provides co-insurance on sub supplies to projects insured by foreign ECAs. Such engagement leads to a suitable risk sharing model among ECAs. This cooperation can also benefit from sharing experience among ECAs.
Due to the fact that the economic success of the Czech Republic is highly dependent on the capability of Czech companies to place their products on foreign markets and regarding that EGAP supports companies exporting their products to markets with high growth potential, subsidizing EGAP is a suitable and effective measure with positive impact on the competitiveness and the public budget of the Czech Republic.
In the framework of the project, EEIP has conducted a survey among Czech banks that cooperate with EGAP (Commerzbank AG, pobočka Praha, Česká spořitelna, a.s. (ČS), Česká exportní banka, a.s. (ČEB), Československá obchodní banka, a.s. (ČSOB), HSBC Bank plc – pobočka Praha, Komerční banka, a.s. (KB), UniCredit Bank). EEIP has also conducted a survey among Czech exporting companies.
The whole analysis is available on the EGAP website. For questions and comments please contact Mr. Matej Urban (matej.urban@eeip.cz).
