African Trade Insurance Agency

1
Understanding Political and Credit Risk
Insurance Peter M. Jones Chief Executive
Officer Making Finance Work for Africa 7-9 May
2007 Livingstone, Zambia
2
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
How Real is Cross Border Risk?
4
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
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
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
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
Mitigating the Risks

• Basic rule insurance is no panacea to a bad
  project.
• Political Risk Insurance enhances the projects
  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
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
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

11
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.

12
Credit Risk Insurance

• Covers the exporter/lender against non payment
  and insolvency of commercial buyers
• Any company of any size is eligible for cover

Africas Export Credit Agency www.ati-aca.com
13
Credit Risk InsuranceCompanies 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
Credit Risk Insurance3 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
Credit Risk InsuranceChallenges 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
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

17
Benefits of Political and Credit Risk Insurance
18
A Risk Management Tool
Confidence
Credit Enhancement
Deterrence to adverse Government actions
Prospect of compensation
Reduction of both capital costs and financing cost
Project risk/ return profile improves for
all investors
Greater interest from debt and equity investors
Investors gain confidence
More deals are closed
19
Understanding ATI
20
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 Lloyds of London and other major
  private insurance companies
• Partners with private and public credit insurers

21
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
ATIs Membership (As of March 2007)

• 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 Members
• Atradius, COMESA, PTA-Bank and ZEP RE

23
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

24
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
• Cost-effective use of underwriting capital
• Reduced over-head costs
• Regional integration through international
  cooperation and risk sharing
• Enhanced possibilities for risk diversification
  by creating a regional risk portfolio (reducing
  the impact of an individual countrys
  volatilities and sector dependencies)
• Encouraging private sector insurers to assume
  risk in Africa

25
ATIs Deterrence Effect

• The underlying countries obligation to make ATI
  whole for any political risk losses they cause,
  together with ATIs multilateral status and the
  strong support from IDA/World Bank create a very
  powerful deterrence effect and
• ATIs African Member States having invested
  directly in ATIs capital enhances ATIs ability
  to resolve disputes without loss.

26
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

27
ATI Eligibility Criteria
ATI-ACA

• 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

28
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
ATI Contacts
Through the ATIs website www.Africa-ECA.com via
Email Underwriting_at_Africa-ECA.com
or Peter.Jones_at_Africa-ECA.com Roland.Pladet_at_Afri
ca-ECA.com Gift.Simwaka_at_Africa-ECA.com By
telephone [phone]