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Understanding Political and Credit Risk Insurance Peter M. Jones Chief Executive Officer Making Finance Work for Africa

Understanding Political and Credit Risk Insurance Peter M. Jones Chief Executive Officer Making Finance Work for Africa 7-9 May 2007 Livingstone, Zambia. Objectives of Presentation.

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Understanding Political and Credit Risk Insurance Peter M. Jones Chief Executive Officer Making Finance Work for Africa

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  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 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. 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 Africa’s Export Credit Agency www.ati-aca.com

  13. 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. 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. 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. Credit Risk Insurance: Benefits • Grow export business with minimal risk • Professional checks on buyers and credit limits • Offer morefavourable 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 Lloyd’s 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. ATI’s 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 country’s volatilities and sector dependencies) • Encouraging private sector insurers to assume risk in Africa

  25. 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. 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 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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