Post on 27-Mar-2015
1
Africa’s Export Credit Agencywww.Africa-ECA.com
Understanding Political and Credit Risk
Insurance
Peter M. JonesChief Executive Officer
Making Finance Work for Africa
7-9 May 2007Livingstone, Zambia
2
Africa’s Export Credit Agencywww.Africa-ECA.com
Objectives of Presentation
• Understand the benefits of Political Risk and Credit Insurance in support of regional and international trade and investment
• Understand how and what the The African Trade Insurance Agency can do to assist regional and international trade and investment
3
Africa’s Export Credit Agencywww.Africa-ECA.com
How Real is Cross Border Risk?
4
Africa’s Export Credit Agencywww.Africa-ECA.com
How Real is Cross Border Risk?•Financial crises in a number of regions
have confirmed that classical political risks do exist.
•Recent investor experience includes:
- Repossession of privatised assets; - Defaults on government obligations; - Revocation of concessions given by previous governments; - Inability to convert or transfer local or foreign currency due to government action or inaction; and - Contract frustration due to inadequate legal & regulatory frameworks.
5
Africa’s Export Credit Agencywww.Africa-ECA.com
What is the Challenge?
• Public sector funding• Accessing private funding opportunities• Matching returns from projects with the cost
of private capital and perceived risks• Making the projects attractive to lenders,
suppliers and investors through – Credible security package– Balanced allocation of attendant project
risks– Acceptable rates of return– Good credit rating
• Discounting the opportunity cost (the return to be made from investments in other sectors which may have equal risk)
6
Africa’s Export Credit Agencywww.Africa-ECA.com
What are the Risks?
• The fundamental principle is that project specific risks should be allocated between the parties to a project who are best able to bear them;
• Risks within the control of the parties to a project: – completion risk;– cost overrun risk; and– performance risk.
7
Africa’s Export Credit Agencywww.Africa-ECA.com
What are the Risks?Risks outside the control of the parties to a
project include:– regulatory risk (cancellation of concession,
withdrawal of licences, non-economic tariffs); – currency risk (inconvertibility and non-
transfer only); – confiscation, expropriation, nationalisation
and deprivation (including creeping expropriation);
– war and civil disturbance, terrorism and sabotage;
– non-payment for services by sovereign and sub-sovereign obligors under a commercial contract.
8
Africa’s Export Credit Agencywww.Africa-ECA.com
Mitigating the Risks
• Basic rule: insurance is no panacea to a bad project.
• Political Risk Insurance: enhances the project’s financiability by transferring political risks from the control of the parties associated with the project to a third party who can better bear the risks through:– specialised knowledge and portfolio
diversification; and– sharing the risks through the use of
reinsurance.
9
Africa’s Export Credit Agencywww.Africa-ECA.com
Mitigating the Risks
• Political Risk Insurance:– by reducing the degree of risk, the cost
of capital is lowered; and– this is achieved by lengthening the term
of the borrowing, reducing the capital charge and thus the loan margin, and potentially the amount of debt provided.
• Credit Risk Insurance:– protects the revenue stream.
10
Africa’s Export Credit Agencywww.Africa-ECA.com
• Events, actions or omissions of a government that are outside the control of the parties to a commercial transaction
• Excludes force majeure events, currency depreciation or devaluation, events in the control of a party in the commercial transaction or lawful actions of a government
Political Risk Insurance:
Definition
11
Africa’s Export Credit Agencywww.Africa-ECA.com
• Equity and quasi-equity
• Shareholder loans and loan guarantees
• Commercial loans
• Examples of other forms of investments:– management contracts;– Leases;– franchising and licensing agreements;– unfair calling of performance bonds.
Political Risk Insurance: Trade and Investments
Covered
12
Africa’s Export Credit Agencywww.Africa-ECA.com
Credit Risk Insurance
• Covers the exporter/lender against non payment and insolvency of commercial buyers
• Any company of any size is eligible for cover
Africa’s Export Credit Agencywww.ati-aca.com
13
Africa’s Export Credit Agencywww.Africa-ECA.com
Credit Risk Insurance:Companies that would
benefit• With limited fixed assets
• That require more efficient debtor management
• Experiencing rapid growth
• Intend or need to offer longer payment terms to their customers (open account)
14
Africa’s Export Credit Agencywww.Africa-ECA.com
Credit Risk Insurance:3 Missions of the Credit
Insurer
• Prevention And Control - Of the inability of customers to
meet their financial obligations
• Indemnification- Up to 90 %
• Recovery of unpaid invoices
15
Africa’s Export Credit Agencywww.Africa-ECA.com
Credit Risk Insurance:Challenges Facing
Exporters
• Buyer & Seller unknown to each other• Different language, customs, laws &
regulations• Cost and terms of bank finance• Buyer wants time to pay• Seller wants immediate payment• Transfer/Payment in foreign currency• Political Risks
16
Africa’s Export Credit Agencywww.Africa-ECA.com
• Grow export business with minimal risk• Professional checks on buyers and credit
limits• Offer more favourable terms (open account)• Offer medium/long term supplier credit• Pre-shipment cover• Security for commercial bank financing• Debt collection throughout the world
Credit Risk Insurance: Benefits
17
Africa’s Export Credit Agencywww.Africa-ECA.com
Benefits of Political and Credit Risk Insurance
18
Africa’s Export Credit Agencywww.Africa-ECA.com
A Risk Management Tool
Investorsgain confidence
Project risk/return profileimproves for allinvestors
Greater interestfrom debt and equity investors
More deals are closed
Confidence Credit Enhancement
Deterrence to adverseGovernment actions
Prospect of compensation
Reduction of bothcapital costs andfinancing cost
19
Africa’s Export Credit Agencywww.Africa-ECA.com
Understanding ATI
20
Africa’s Export Credit Agencywww.Africa-ECA.com
Understanding ATI
• A Multilateral Political Risk and Credit Risk Insurer
• Established at the initiative of COMESA and owned by African Member States
• Supported by the World Bank
• Partners with Lloyd’s of London and other major private insurance companies
• Partners with private and public credit insurers
21
Africa’s Export Credit Agencywww.Africa-ECA.com
ATI Mandate
“Facilitate private sector-led trade flows, investment and ‘productive activities’ through the provision of insurance, coinsurance & reinsurance, financial instruments and related services.”
22
Africa’s Export Credit Agencywww.Africa-ECA.com
African Member Countries• Burundi • Democratic Republic of Congo• Kenya• Madagascar• Malawi• Rwanda • Tanzania• Uganda • Zambia
*Djibouti and Eritrea are signatories (pending ratification)*Liberia and Sudan have been accepted into membership (pending signature and ratification)
ATI is open to all African Union Member States
Corporate & Regional Body MembersAtradius, COMESA, PTA-Bank and ZEP RE
ATI’s Membership (As of March 2007)
23
Africa’s Export Credit Agencywww.Africa-ECA.com
Focus on new African Member Countries:
Eastern and Southern Africa:Angola, Ethiopia, Mozambique and Sudan Western Africa:Ghana, Guinea (Conakry), Mali, Nigeria & Senegal
Indian Ocean:Comoros, Mauritius and Seychelles
Focus on new Regional Body Members:ECOWAS, SADC, AfDB,…
Local, regional and international public and private donors, investors and financial institutions
ATI: New Membership Recruitment
24
Africa’s Export Credit Agencywww.Africa-ECA.com
ATI: What is its rationale?• The relatively small volumes of trade and
investment in many ATI Member States do not merit the establishment of national insurers.
• ATI helps reduce the ‘costs of doing business’ in Africa by:1. Cost-effective use of underwriting capital2. Reduced over-head costs3. Regional integration through international
cooperation and risk sharing4. Enhanced possibilities for risk diversification by
creating a regional risk portfolio (reducing the impact of an individual country’s volatilities and sector dependencies)
5. Encouraging private sector insurers to assume risk in Africa
25
Africa’s Export Credit Agencywww.Africa-ECA.com
ATI’s Deterrence Effect
•The underlying countries’ obligation to make ATI whole for any political risk losses they cause, together with ATI’s multilateral status and the strong support from IDA/World Bank create a very powerful deterrence effect; and
•ATI’s African Member States having invested directly in ATI’s capital enhances ATI’s ability to resolve disputes without loss.
26
Africa’s Export Credit Agencywww.Africa-ECA.com
• Political Risk Insurance for trade & investment
• Mobile assets insurance• Unfair calling of bonds insurance• Inter & Intra-regional and Domestic Whole
Turnover Credit Insurance with typical payment terms of up to 12 months
• Comprehensive Nonpayment Cover for single (structured) credits to:- Private obligors;- Parastatal obligors; and- Sovereign obligors
ATI: Product Offering
27
Africa’s Export Credit Agencywww.Africa-ECA.com
•Investment and trade transactions (including expansions or privatizations of existing projects)
•Excluded sectors/goods follow World Bank Guidelines
•Private, Public or Sovereign Obligors
•Credit Risk: Buyer or Seller in ATI-Member Country
•Investment: Project in ATI-Member Country
•Environmental clearance required
ATI-ACAATI Eligibility
Criteria
28
Africa’s Export Credit Agencywww.Africa-ECA.com
ATI: Most Common Terms
• Tenors up to 10 years
• No minimum transaction size
• Indemnity:
- Up to 100% (Political Risks) - Up to 90% (Commercial Risks)
• Competitive risk-based pricing
29
Africa’s Export Credit Agencywww.Africa-ECA.com
Through the ATI’s website www.Africa-ECA.com
via EmailUnderwriting@Africa-ECA.com
orPeter.Jones@Africa-ECA.com
Roland.Pladet@Africa-ECA.comGift.Simwaka@Africa-ECA.com
By telephone +254 (0)20 272 6999
ATI Contacts