B.3. INCENTIVES PROVIDED BY THE KOREA EXPORT-IMPORT BANK
The Export-Import Bank of Korea
The Export-Import Bank of Korea (hereinafter KEXIM) was established in 1976 pursuant to the Export-Import Bank of Korea Act. KEXIM aims to promote growth and development of the Korean economy and to facilitate trade with foreign countries. In order to achieve this goal, KEXIM provides a number of financial services such as loans, guarantees and trade-related financing. However, its primary function is to provide financing for the exportation of capital goods and services, overseas investment and major resource developments.
Pursuant to Article 4 of the KEXIM Act, the capital of KEXIM shall be 4 trillion Won which is subscribed by the GOK (54.8%), the Bank of Korea (39%) and Korea Development Bank (6.2%). The latter 2 banks are government-owned financial institutions.
The financing activities of KEXIM
In order to meet these objectives, KEXIM developed a number of financing tools which can be divided in 3 categories:
||Financing for domestic suppliers: export loans to domestic suppliers, pre-shipment credit, technical service credits, overseas investment and project credits, major resources development credits, import credits and rediscount on trade bills. All shipyards investigated used the pre-shipment export credit. Daewoo, Hyundai Mipo and Hyundai Heavy Industries used the export loan programme.
||Financing for foreign buyers: direct loans to foreign buyers, project
finance, re-lending facility to foreign banks and overseas business credit. It
appears that this programme was not used in the IP.
||Guarantees: advance payment guarantees and project related guarantees.
All shipyards investigated used the advance payment refund guarantee programme.
As regards the shipbuilding industry, KEXIM provided during the period of investigation export loans, pre-shipment export credits and advance payment guarantees.
I. Export Loans
With regard to the Kexim export loans it concerns a transfer of funds (loans within the meaning of Article 1.1. (a)(1)(i)) by a state controlled bank to the beneficiary. In particular, Kexim financing confers a "benefit" on their recipients because it provide Korean shipbuilders with financial support (interest on loans) on more advantageous terms than they would otherwise be able to obtain in the Korean financial market. CESA claims that Kexim financing was hardly above LIBOR and well below the OECD minimum interest rates which the WTO Appellate Body (Canada-Civilian Aircraft) has deemed an appropriate market benchmark for determining whether a government has provided preferential interest rates. Furthermore, the European Commission has already found Kexim export financing to constitute a countervailable export subsidy in two countervailing investigations into steel wire.52 The KEXIM export credits are "contingent in law ... upon export performance" under Article 3.1 of the ASCM because they are expressly made conditional upon export activity, by extending financing to Korean exporters as a supplier credit in order to provide them with the required funds to finance exports. They therefore constitute export subsidies which are per se specific in accordance with Article 2.3 of the ASCM.
CESA also claims that the above programme constitutes a prohibited subsidy and examines whether the export credit financing are specifically included in the "safe havens" of item (k) of the Illustrative List of Export Subsidies in Annex I to the ASCM53.
Pursuant to the KEXIM Act, KEXIM provides export loans to Korean shipyards and loans to foreign shipowners. The eligibility for this programme is determined by a number of factors:
- the county of destination should not be classified as a "High Risk Country"
- the capital goods should be designated by KEXIM
- the borrower's creditworthiness should be strong enough
- no net losses during past 3 fiscal years
- outstanding debts should not exceed shareholder's equity
- credit rating should be above a certain degree
- debt-to-equity ratio is at a certain level
The applicant makes an application to KEXIM indicating the required terms and conditions of the credit After analysis of the dossier, KEXIM usually provides a preliminary approval if the criteria for eligibility are met. After a more detailed analysis of the application, KEXIM will enter into an export contract with the shipyard. The export contract can be granted in foreign currency or Korean Won. The ceiling amount for export loans is up to 100% of the export contract amount minus the required cash payment which for the shipbuilding sector is 20% of the export contract amount. The maximum period of repayment is 8.5 years.
According to the GOK, the interest rate cannot be less than 8%. KEXIM stated that the interest rate is determined by the contract amount, the collateral provided, the repayment period and the credit risk assessment.
II. Pre-shipment export credits
The eligibility criteria and the operation of the programme are basically identical as those applied to export loans. However, the ceiling amount is established at 90% of the contract amount.
For export credits expressed in foreign currency, the interest rate is determined by the aggregate of the following basic elements:
||base rate which is the foreign currency LIBOR rate
||minimum spread which reflects the amount of the funding costs of foreign currency
plus administration expenses and mark-up
||term risk spread is added by 0.1% point for loans having repayment period
between 2-3 years. If the loan is shorter no premium is added.
||credit risk spread of up to 2% point based on the credit valuation by KEXIM
|For export credits expressed in Korean Won,
the interest rate is determined by the aggregate of the following basic elements:
||Prime rate which is determined on the market yield rate of industrial finance
bonds of KDB
||credit spread risk of up to 3% point based on the credit evaluation by KEXIM.
||special adjustment spread: KEXIM may add a special adjustment spread based
on market conditions and market interest rates.
III. KEXIM guarantees
The KEXIM advance payment refund guarantee (APRG) programme concerns a potential transfer of funds (within the meaning of Article 1.1. (a)(1)(i)) by a state controlled bank to a purchaser of a Korean ship in case of non-performance by the Korean exporter (the shipbuilder). The guarantee is granted by Kexim subject to the payment of a premium by the Korean exporter. Kexim guarantees allegedly confer a "benefit" on the exporter by providing financial support on more advantageous terms (in the form of charging lower non commercial premium fees) than the exporter in question would otherwise be able to obtain in the Korean financial market, As the guarantees are offered for the purpose of guaranteeing 100% of the down-payments for exported Korean goods any transaction financed through KEXIM's advance payment guarantee programme is necessarily an export transaction and as such the associated guarantees are expressly "contingent in law ... upon export performance." They therefore constitute export subsidies which are per se specific in accordance with Article 2.3 of the ASCM.
CESA claims that export credit guarantees (such as the advanced payment guarantees described above) are specifically included in item (j) of the Illustrative List of Export Subsidies in Annex I to the ASCM, which covers: "The provision by governments (or special institutions controlled by governments) of export credit guarantee or insurance programmes ... at premium rates which are inadequate to cover the long-term operating costs and losses of the programmes". Thus, export credit guarantees which do not cover the long term operating costs and losses of the programmes constitute export subsidies which are prohibited within the terms of the ASCM54.
Under this programme, KEXIM provides guarantees to Korean and foreign commercial banks involved in the financing of eligible projects as well as directly to foreign importers. The eligibility criteria and the operation of the programme are basically identical as those applied to export loans.
The amount guaranteed is 100% of the principal and interest.
In 1999, the total guarantee commitments of KEXIM were Won 2,919 Billion.
According to KEXIM, the guarantee fee for banks is equal to the minimum amount in the OECD guidelines. The fee for the importer is determined on a case-by-case basis depending on the risk of the related transaction and the credit risk of the borrower.
In 1999, the total guarantee fees and commissions paid to KEXIM amounted to Won 59,497 million. KEXIM confirmed that about 70% of the total guarantee amount is provided for the shipbuilding industry.
Under Article 1 of the ASCM a subsidy exists if(1) "there is a financial contribution by a government or any other public body ... [including] ・・・ where a government makes payments to a funding mechanism, or entrusts or directs a private body to carry out [these] functions"; and (2) "a benefit is thereby conferred".
A subsidy is prohibited under Article 3 of the ASCM if it is "contingent, in law or in fact, whether solely or as one of several other conditions, upon export performance, including those illustrated in Annex I" (the "Illustrative List of Export Subsidies). A subsidy contingent upon export performance is per se prohibited and there fore, there is no need to show adverse effects. Export credit programmes are expressly included within the scope of Annex I of the ASCM; thus, government programmes falling squarely within the provisions of Annex I are ipso facto prohibited subsidies in violation of Article 3.1(a).
With regard to the advance payment guarantee scheme the complaint contains examples of Kexim support with regard to Halla at terms which do not seem justified by its precarious situation. It is claimed that the premiums charged on Halla's guarantees in no way reflect the fact that the guarantees are granted to a bankrupt company
During the investigation, KEXIM and the co-operating shipyards considered that any information regarding the individual terms of KEXIM financing is confidential information and that any release of information regarding the terms and conditions of KEXIM financing would cause serious commercial damage.
As regards the APRGs, KEXIM only provided the income which was de rived from the APRG premiums. On the revenue side, KEXIM stated that since 1976 only one guarantee transaction had to be covered by KEXIM. This information could not be verified. In addition, no verifiable information was provided regarding the credit risk assessment of shipyards undergoing corporate restructuring or under court receivership.
Since GOK has not co-operated during the proceeding regarding this programme, the Commission has used facts available and based its assesment of the APRG scheme on other sources.
1. KEXIM classified APRGs as not recoverable
The KEXIM annual accounts provide factual information regarding the financing under this scheme. At the end of 1999, the total outstanding guarantee commitments of KEXIM amounted to $3.943 billion. In the notes to the accounts, special reference is made regarding guarantees for the Daewoo companies. In this respect, KEXIM has provided APRGs in the amount of $954 million to Daewoo which constitutes 24% of the total outstanding commitments under this scheme. It is important to note that KEXIM has classified the total amount of outstanding commitments to Deawoo as less than normal i.e. precautionary and substandard. This classification indicates that KEXIM itself has serious doubts whether Daewoo would be able to fulfill its commitments and that it is highly likely that KEXIM would have to fulfill its guarantee obligation.
2. KEXIM provides APRGs to uncrediworthy shipyards
During the investigation, it was establsihed that KEXIM has continued to provide APRGs after companies faced financial difficulties and went in cout-supervised restructuring or under workout. As explained before, there is no doubt that these companies were virtually bankrupt. Under these circumstances, it should be questioned whether KEXIM was inspired by pure commercial motifs in granting APRGs.
The fact that KEXIM acted in a commercial manner should be measured through the credit risk assesment of these companies. The GOK has recognised in its Letter of Intent to IMF (10 March 1999) that the specialised banks which includes KEXIM, were inefficient in the risk management. The GOK stated that it will "improve risk management including: (i) systems to better evaluate credit risk, manage and administer loans, and limit credit exposure; (ii) systems to monitor and control risk (this would include interest rate, credit, market, and operational risk) on a bank-wide basis; and (iii) systems to evaluate compliance with established guidelines for risk management and internal audits."
Consequently, KEXIM has provided APRGs without making an adequate credit risk adjustment to the APRG premiums.
3. The GOK has provided extensive capital contributions to KEXIM
The complainant has already submitted information which alleged that KEXIM has received capital contributions in 1997, 1998 and 1999 which strongly indicates KEXIM could not cover the costs of its operations.
According to the 1999 annual accounts, the paid-in capital of KEXIM was increased by W800 billion through capital subscriptions of the GOK (W100 billion) and the Bank of Korea (W700 billion). KEXIM describes this capital increase "as part of the Bank's effort to continuously strengthen its capital base to meet the customer's loan needs".
At the beginning of 1999, the paid-in capital of KEXIM was W1,257 billion.
Consequently, the capital of KEXIM was during 1999 increased by 63%. On the other hand, the bank's loan disbursements increased in 1999 by 17%. It is therefore difficult to justify that the customer's needs or the future loan targets were the main reason for this capital increase. Combined with the large amount of outstanding debt which is classified below normal, it can only be concluded that the APRG scheme is not able to cover operating costs and losses.
In conclusion, on the basis of these factors, the advance payment guarantees are at premia which are inadequate to cover long-term operating costs of the APRG programme. It is not in conformity with item (j) of Annex I to the ASCM and therefore constitutes an export subsidy under Article 3.1(a) ASCM.
With regard to the export credits and loans CESA claims that Kexim financing was hardly above LIBOR and well below the OECD minimum interest rates which the WTO Appellate Body (Canada-Civilian Aircraft) has deemed an appropriate market benchmark for determining whether a government has provided preferential interest rates.
Although the GOK did not co-operate in the proceeding as regards this scheme, the investigation revealed that export credit financing is not in compliance with the ASCM.
1. KEXIM did not provide financing under normal commercial conditions
In providing export credit financing, KEXIM did not act as a normal commercial financial institution. In the 1999 annual accounts, KEXIM confirms that "the bank contributed to the recovery by providing a variety of financing schemes to exporters as well as importers, who have experienced difficulty in obtaining adequate trade-related financing from commercial financial institutions". Thus, the annual accounts imply that KEXIM has provided export credits to Korean companies in cases where the private financial institutions were not willing to finance the projects. In other words, these companies were considered to be uncreditworthy. This is illustrated by the export credits granted to Daewoo. At the end of 1999, the total outstanding export credits for Daewoo were US$ 1.426 Billion of which US$ 1.039 is classified at less than normal i.e. precautionary, substandard or doubtfull.
In 1999, export credit financing accounted for 99.5% of total KEXIM financing amounting to W7.7 trillion, which is an increase of 20.4% compared to 1998. This increase explains the fact that a large number of companies were not able to obtain trade-related financing from commercial financial institutions and therefore, relied on KEXIM to finance export activities.
In that respect, as stated in the complaint and explained under the APRG analysis above, KEXIM did not seem to apply proper credit risk assesment policies in the period in question.
Furthermore, it is noteworthy that the export credit practice of KEXIM is predominantly used for financing exports of ships and industrial plants. These two categories cover 97.3% of KEXIM's credit financing.
2. KEXIM export credit financing has already be found to constitute export subsidies
The European Commission has already found Kexim export financing to constitute a countervailable export subsidy in two countervailing investigations into steel wire.55
3. KEXIM financing does not fall within the the safe haven provisions
The GOK has claimed that the guarantees in question fall within the "safe haven" of the relevant provisions of Annex I of the ASCM and are therefore not prohibited export subsidies. In that respect, it has been claimed that the export credit practices in question fall within the "safe havens" of paragraph (k) of Annex I.
However, with regard to the exemption by virtue of Korea's participation in the OECD Arrangement on Guidelines for Officially Supported Export Credits under the "safe harbour" provision of Annex I(k) of the ASCM, it seems that the relevant requirements are not met. The safe haven exception requires a government to affirmatively prove that the terms of its export credit practice are "in conformity with those provisions [of an international undertaking on export credit terms]," in order to successfully defend against a claim that the practice is a prohibited export subsidy. Annex I of the Arrangement on Guidelines for Officially Supported Export Credits (the "OECD Arrangement") to which Korea is a Party contains the Sector Understanding on Export Credits for Ships which requires that "official facilities" for export credits are allowed provided a number of conditions are met e.g. that either market rates or minimum interest rates are applied (8%); the information in the complaint suggests that the terms offered by Kexim do not meet the requirements of the Understanding.
In any event, with regard to the "safe haven" provisions the Appelate Body has ruled in Brazil-Export Financing Programme for Aircraft (21 July 2000) that they constitute affirmative defences so that the burden of proof lies with the WTO Member invoking the defence i.e. in this case Korea. The GOK has, however, failed to produce the relevant evidence during the investigation.
The above-mentioned factors lead to the conclusion that export credit financing for the shipbuilding industry constitutes an export subsidy under Article 3.1(a) ASCM. Export credit financing is granted at rates below those which they actually have to pay for the funds so employed or if they borrowed on international capital markets. As stated above, KEXIM had to increase its paid-in capital by 63% in order to continue financing projects. Consequently, it should be concluded that the interest rates charged do not reflect the creditworthiness of the company. In addition, a large amount of export credit financing is also classified as being below normal.
In view of the above, it can be assumed that the GOK has probably granted prohibited export subsidies under the KEXIM schemes.
The Commission will, however, continue its analysis of the KEXIM programmes with a view to collect an information available and assess their impact on the shipbuilding market.
52 Commission Regulations 618/1999 and 619/1999 of 23 March 1999 (OJL79).
53 Even if not found to be prohibited, such subsidies are still actionable under Article 5 of the ASCM if they cause adverse effects.
54 Even if not found to be prohibited, such subsidies are still actionable under Article 5 of the ASCM if they cause adverse effects.
55 Commission Regulations 618/1999 and 619/1999 of 23 March 1999 (OJL79).