Africas Export Credit Agency 1 Understanding Political and Credit Risk Insurance Peter M. Jones Chief Executive Officer Making Finance

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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

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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

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How Real is Cross Border Risk?

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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.

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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)

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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.

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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.

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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.

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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.

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• 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

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• 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

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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

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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)

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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

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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

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• 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

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Benefits of Political and Credit Risk Insurance

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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

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Understanding ATI

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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

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ATI Mandate

“Facilitate private sector-led trade flows, investment and ‘productive activities’ through the provision of insurance, coinsurance & reinsurance, financial instruments and related services.”

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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)

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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

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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

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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.

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• 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

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•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

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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

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Through the ATI’s website www.Africa-ECA.com

via [email protected]

[email protected]

[email protected]@Africa-ECA.com

By telephone +254 (0)20 272 6999

ATI Contacts

Documents

Africas Export Credit Agency 1 Understanding Political and Credit Risk Insurance Peter M. Jones Chief Executive Officer Making Finance