Understanding Political
and Credit Risk Insurance
Peter M. Jones
Chief Executive Officer
Making Finance Work for Africa
7-9 May 2007
Livingstone, Zambia
Africa’s Export Credit Agency
www.Africa-ECA.com
1
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
Africa’s Export Credit Agency
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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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www.Africa-ECA.com
9
Political Risk Insurance:
Definition
•
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
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Political Risk Insurance:
Trade and Investments Covered
• 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.
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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
Africa’s Export
Export Credit
Credit Agency
Agency
www.Africa-ECA.com
www.ati-aca.com
12
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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Credit Risk Insurance:
Benefits
•
•
•
•
•
•
•
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
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Benefits of Political and
Credit Risk Insurance
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A Risk Management Tool
Deterrence to
adverse
Government actions
Investors
gain
confidence
Prospect of
compensation
Project risk/
return profile
improves for all
investors
Reduction of both
capital costs and
financing cost
Greater interest
from debt and
equity investors
More deals
are closed
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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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ATI’s Membership
African Member Countries
• Burundi
• Democratic Republic of Congo
• Kenya
• Madagascar
• Malawi
• Rwanda
• Tanzania
• Uganda
• Zambia
(As of March 2007)
*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 Members
Atradius, COMESA, PTA-Bank and ZEP RE
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ATI: New Membership
Recruitment
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
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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 capital
2. Reduced over-head costs
3. Regional integration through international cooperation
and risk sharing
4. 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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ATI: Product Offering
•
•
•
•
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
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ATI-ACA
ATI Eligibility
Criteria
•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
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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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ATI Contacts
Through the ATI’s website
www.Africa-ECA.com
via Email
Underwriting@Africa-ECA.com
or
Peter.Jones@Africa-ECA.com
Roland.Pladet@Africa-ECA.com
Gift.Simwaka@Africa-ECA.com
By telephone
+254 (0)20 272 6999
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