Presentation on theme: "Understanding Political and Credit Risk Insurance"— Presentation transcript:
1 Understanding Political and Credit Risk Insurance Peter M. JonesChief Executive OfficerMaking Finance Work for Africa7-9 May 2007Livingstone, Zambia
2 Objectives of Presentation Understand the benefits of Political Risk and Credit Insurance in support of regional and international trade and investmentUnderstand how and what the The African Trade Insurance Agency can do to assist regional and international trade and investment
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 opportunitiesMatching returns from projects with the cost of private capital and perceived risksMaking the projects attractive to lenders, suppliers and investors throughCredible security packageBalanced allocation of attendant project risksAcceptable rates of returnGood credit ratingDiscounting 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; andperformance 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 RisksBasic 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; andsharing 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; andthis 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 transactionExcludes 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-equityShareholder loans and loan guaranteesCommercial loansExamples of other forms of investments:management contracts;Leases;franchising and licensing agreements;unfair calling of performance bonds.
12 Africa’s Export Credit Agency Credit Risk InsuranceCovers the exporter/lender against non payment and insolvency of commercial buyersAny company of any size is eligible for coverAfrica’s Export Credit Agency
13 Credit Risk Insurance: Companies that would benefit With limited fixed assetsThat require more efficient debtor managementExperiencing rapid growthIntend 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 obligationsIndemnification- Up to 90 %Recovery of unpaid invoices
15 Credit Risk Insurance: Challenges Facing Exporters Buyer & Seller unknown to each otherDifferent language, customs, laws & regulationsCost and terms of bank financeBuyer wants time to paySeller wants immediate paymentTransfer/Payment in foreign currencyPolitical Risks
16 Credit Risk Insurance: BenefitsGrow export business with minimal riskProfessional checks on buyers and credit limitsOffer more favourable terms (open account)Offer medium/long term supplier creditPre-shipment coverSecurity for commercial bank financingDebt collection throughout the world
17 Benefits of Political and Credit Risk Insurance
18 A Risk Management Tool Confidence Credit Enhancement Project risk/ Deterrence toadverseGovernment actionsProspect ofcompensationReduction of bothcapital costs andfinancing costProject risk/return profileimproves for allinvestorsGreater interestfrom debt andequity investorsInvestorsgainconfidenceMore dealsare closed
20 Understanding ATIA Multilateral Political Risk and Credit Risk InsurerEstablished at the initiative of COMESA and owned by African Member StatesSupported by the World BankPartners with Lloyd’s of London and other major private insurance companiesPartners 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 CongoKenyaMadagascarMalawiRwandaTanzaniaUgandaZambia*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 StatesCorporate & Regional Body MembersAtradius, 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 SudanWestern Africa:Ghana, Guinea (Conakry), Mali, Nigeria & SenegalIndian Ocean:Comoros, Mauritius and SeychellesFocus 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 capitalReduced over-head costsRegional integration through international cooperation and risk sharingEnhanced 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; andATI’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 insuranceUnfair calling of bonds insuranceInter & Intra-regional and Domestic Whole Turnover Credit Insurance with typical payment terms of up to 12 monthsComprehensive Nonpayment Cover for single (structured) credits to:- Private obligors;- Parastatal obligors; and- Sovereign obligors
27 ATI Eligibility Criteria ATI-ACAInvestment and trade transactions (including expansions or privatizations of existing projects)Excluded sectors/goods follow World Bank GuidelinesPrivate, Public or Sovereign ObligorsCredit Risk: Buyer or Seller in ATI-Member CountryInvestment: Project in ATI-Member CountryEnvironmental clearance requiredPrincipal line of businessTrade Political Risks ( = CF excl np and prox)Issue Lloyds policyBlocking and TrappingNo confidentiality warranty
28 ATI: Most Common Terms Tenors up to 10 years No minimum transaction sizeIndemnity:- Up to 100% (Political Risks)- Up to 90% (Commercial Risks)Competitive risk-based pricing
29 Through the ATI’s website ATI ContactsThrough the ATI’s websiteviaorBy telephone+254 (0)