The Government's new export credit guarantee scheme is expected to support exports of at least $100 million a year, Associate Minister of Foreign Affairs and Trade Pete Hodgson said today.

Mr Hodgson said the scheme, promised by Labour before the last general election, would be targeted at small to medium sized export firms with growth potential.

It involves the Government working with the private sector to provide underwriting services for exporters who need finance between shipping an export order and being paid for delivery. The scheme provides a credit guarantee, rather than cash.

“Trade credit insurance is a complex and specialised business and we want to work closely with private sector providers to draw on their risk assessment and other technical knowledge," Mr Hodgson said. "We will be limiting the Government's exposure to 60% of any one deal."

The total maximum contingent liability accepted by the Government in operating the scheme will be $350 million. On a 60-40 risk sharing basis, that amounts to nearly $600 million of new cover becoming available. That is expected to support four or five new medium- to long-term export credit guarantees a year, averaging about $15 million each and facilitating about $100 million of exports a year.

The Government will set aside $35 million of the scheme for emergency short term cover to support existing trade when changed economic circumstances in offshore markets make it difficult for exporters to obtain insurance there. If required, this facility would enable cover to be provided for exports worth up to $230 million a year.

"This scheme is a promise kept and another key step in our strategy for export growth," Mr Hodgson said. "New Zealand is again offering its exporters a basic measure of support that is available to exporters in nearly every other developed nation."

Mr Hodgson said research and consultation with exporters had shown there was a market gap in the provision of export credit facilities, particularly for exports to higher-risk markets.

"The Government is setting out to extend rather than replace the capacity of commercial providers in this area. This is about taking a carefully calculated risk for the sake of increased exports, foreign exchange earnings and jobs."

Trade New Zealand will be providing information on export credit to exporters through direct mail, its website, an 0800 hotline and nationwide roadshow presentations.

Attached: Questions and answers on export credits

Graeme Speden, press secretary: 04 471 9707 / 025 270 9055
Export Credits – Questions and Answers

What is an export credit guarantee?
An export credit guarantee is a form of insurance that covers an exporter against non-payment by the importer or its bank. The insurer – often a government agency – underwrites the risk, enabling the exporter to obtain credit from other sources as necessary. Medium- to long-term export credit guarantees cover exporters for several years: in the New Zealand scheme they are expected to average about six years. This form of underwriting is commonly associated with capital goods projects such as engineering and construction.

What is short-term trade credit reinsurance?
Short term trade credit reinsurance provides the similar cover to an export credit guarantee but for shorter periods. The standard term for cover is 90 days. Short-term cover in the New Zealand scheme will be targeted at exports to higher-risk markets.

Who will be eligible for cover under the new scheme?
The scheme will be targeted at small to medium sized firms that are not able to self-insure. Short term trade credit reinsurance will be limited to firms with a capitalisation of less than $NZ200 million. Applicants will have to be New Zealand-based producers with the potential to generate new added-value exports.

What will it cost the Government?
The scheme as a whole will be operated to cover its costs. Premiums will be set at a level to the administrative costs and the risk of claims falling due. As such, it will have no direct impact on the Crown’s operating balance. The underwriting liability will be borne by the Crown as a contingent liability.

Who will run this?
There is a range of possibilities, from a unit within a Government department, to a free-standing unit at arms’ length from Government, to a contracted private provider. Each has different statutory and other requirements. Officials will be advising in the next few months on the detail of the delivery mechanism now that the broad design has been agreed.

How will private sector insurers be affected?
The scheme is designed to extend, not replace, the capacity of private sector providers of export credit. The Government will be sharing underwriting with private sector providers, which will extend the business opportunities open to them. There are about a dozen active private sector providers of export credit, including major trading banks, merchant banks and insurers. Some insurance brokers are also involved.

Why is Trade New Zealand running an information programme?
Research on export credit issues showed that a lack of information on the existing private sector export credit facilities available to exporters was a significant issue. Trade New Zealand will therefore be making information and expertise on export credit more accessible to exporters – on both the private and the Government services available.

When will the scheme open for business?
The Government aims to open the scheme by 31 March next year. It will be reviewed after a year to ensure it is achieving the Government's goals.

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