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. Africa’s Export Credit Agency
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

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 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 Project risk/
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
Principal line of business
Trade Political Risks ( = CF excl np and prox)
Issue Lloyds policy
Blocking and Trapping
No confidentiality warranty

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. Through the ATI’s website
ATI Contacts
Through the ATI’s website
via or
By telephone
+254 (0)