African Trade Insurance Agency

1
How ATI Mitigates Investment and Credit Risk
Gift Simwaka Underwriter Presentation at
the EU Seminar on Products Services Provided by
EU Financial Institutions Products and
Services Provided by EU Financial Institutions
and Programmes 27 November 2007 Lusaka, Zambia
2
Objectives of Presentation

• Brief Profile of the African Trade Insurance
  Agency
• Understand the benefits of Investment and Credit
  Risk Insurance in support of domestic, regional
  and international trade and investment
• Understand how and what the African Trade
  Insurance Agency can do to facilitate economic
  development through risk mitigation

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The African challenge

• Perception of risk in Africa results in
• Fewer trade transactions
• High transaction costs
• Market gap in risk mitigating tools
• Perception v Reality?
• FDI at 0.7 of global
• yet returns of up to 30 against up to
• 15 (US), and 10 (EU)

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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 Lloyds of London and other
• major public and private investment
• insurers
• Partners with private and public credit risk
• insurers such as Atradius

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Membership (As of September 2007)

• Member countries
• Burundi, Djibouti, D.R. Congo, Eritrea,
  Kenya, Madagascar, Malawi, Rwanda, Sudan,Uganda,
  Tanzania, Zambia.
• But open to all AU member states
• Interest from Angola, Egypt, Ethiopia, Ghana,
  Liberia, Mauritania, Mozambique, Senegal,
  Seychelles.
• Corporate members
• Atradius, COMESA, PTA Bank, ZEP-RE.
• Interest from SACE, ECOWAS, Sinosure
• To be ratified

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Objectives

• Mandate Facilitate private sector led trade
  flows, investments and productive activities
  through the provision of insurance, coinsurance
  and reinsurance, financial instruments and
  related services.
• That means
• Mobilisation of support from private sector
  financial institutions
• Promotion of Intra - African trade investment
• How
• Using combination of
• private sector experience capital and
• public sector clout and connections

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What is the rationale?

• The relatively small volumes of trade and
  investment in many ATI Member States do not merit
  the establishment of national ECAs.
• 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 on the back of an African
  Institution

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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
  abilities to resolve disputes without loss.

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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 Non-payment Cover for single
  (structured) credits to
• - Private obligors
• - Parastatal obligors and
• - Sovereign obligors

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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 Insurance Buyer or Seller in ATI-Member
  Country
• Investment Insurance Project or Investor in
  ATI-Member Country
• Environmental clearance required

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Most Common Terms

• Tenors up to 10 years
• No Minimum Transaction Amount
• Indemnity
• - Up to 100 (Political Risks)
• - Up to 85 (Commercial Risks)
• Competitive risk-based pricing

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Financing Challenges

• 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 or
  transaction specific risks should be allocated to
  parties who are best able to bear them
• Risks within the control of the parties to a
  project include
• 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)
• Inability to convert local currency to the
  currency of investment and transfer funds
• expropriation
• Political violence
• non-payment 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 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.

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Reduces the Cost

• Political Risk Insurance
• by reducing the degree of risk, the cost of
  capital is lowered and
• this is achieved by lengthening the term of
  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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An Investment Decision Tool

• Political Risk Insurance
• Aims at making a foreign investor or trader
  indifferent as to whether he will make his
  investment or conduct his trade in his home
  country or in the (African) host country where
  his risk perception includes one or more of the
  insurable political risks

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Political Risk Insurance Examples of Political
Risk

• Non-payment by Public Buyers
• War Civil Disturbance
• Embargo
• Currency Inconvertibility
• Transfer Restriction
• Expropriation, Nationalization
• Cancellation of import/export licenses
• Imposition of discriminatory import duties
• Retroactive and/or discriminatory tax changes

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Political Risk Insurance Currency Transfer
Restriction and Inconvertibility

• Protects against losses arising from
• Inability to convert local currency into
  investment currency or
• Inability to transfer investment currency
• Currency depreciation or devaluation not covered

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Political Risk Insurance Expropriation

• Protects against losses arising from
• Nationalization and confiscation
• Creeping expropriation or
• Expropriation of funds (limited form of cover).
• Measure has to be discriminatory and confiscatory
  and without adequate compensation.

22
Political Risk Insurance War and Civil
Disturbance

• Protects against losses arising from
• Damage/disappearance of tangible assets
• Business interruption leading to a total loss of
  the investment
• (includes losses due to sabotage and terrorism
  when politically motivated)

23
Political Risk Insurance Breach of Contract

• Protects against losses arising from
• - Breach or repudiation of a contract between
  the investor and the Host Country authorities
  resulting in
• Inability to enforce a final binding arbitral
  award in favour of the investor against the Host
  Government

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Illustrative Case Study Lenders Interest Cover

• TRANSACTION Mining contract 15 million
• INTEREST Contractors plant and equipment
• TENOR 4 years
• INSURED European contractor
• EMPLOYER Mining company
• COVER Expropriation, Deprivation,
  Abandonment, War Terrorism
• INDEMNITY 100

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Credit Risk Insurance

• Covers the exporter 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
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Credit Risk InsuranceCompanies that would
benefit

• Traders with limited fixed assets
• Companies that require more efficient debtor
  management
• Experiencing rapid growth
• Intention is to offer longer payment terms to
  their customers (open account)

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Credit Risk InsuranceProblems 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
Solutions and Benefits

• Grow export business with Minimal Risk
• Professional checks on buyers and credit limits
• Open account trading or offer more favorable
  terms
• Offer medium/long term Supplier Credit
• Pre-shipment Cover
• Security for Bank Financing
• Debt Collection throughout the world

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Credit Risk Insurance
Example

• TRANSACTION Sale of Flowers
• ANNUAL TURNOVER USD 5 million
• RISK COUNTRIES Australia, Belgium, France,
  Germany,
• 
  Italy, Japan,
• 
  Portugal, Switzerland
• TENOR One year
• BUYERS Wholesalers
• COVER Credit Insurance
• INDEMNITY 85

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Benefits of Political and Credit Risk Insurance
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A Risk Management Tool

• Credit enhancement
• - Improves the overall risk-return profile of
  the project
• - Reduces provisioning requirements for lenders
• - Lowers cost of financing
• Confidence
• - Deterrent against host government interference
• - Gives investors confidence in investing in new
  frontier markets
• - Mediation of investment disputes
• Stability
• - Provides stable environment for business
  operations

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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
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Change in Capital Structure
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New Capital Structure

• IDA credits along with new capital sources will
  be used by Member States to capitalize ATI
• Capitalization will allow more flexible,
  effective and efficient use of ATI resources

ATI Capital to support its entire business
ATI
35
Future Underwriting Capacity
ATI Total Underwriting Capacity USD 1 billion

Re/Co- insured risk
Leverage up to 3-4 times
ATI becomes a distributor of African risk
allowing it to access treaty and facultative
reinsurance potentially increasing its
underwriting capacity up to USD 600 million
ATI risk per country Country Risk Limits
Total ATI Capital 134 million (9 countries)
plus new member contributions
Burundi USD 15 m
Zambia USD 15 m
Kenya USD 25 m
ATI loan USD 10m
WB/IDA (sum of country credits USD 134 m)
New Members
36
Current Underwriting Capacity
Constraints under present ATI set-up

• ATI has minimal capital
• Funding limited to individual country credits
• ATI can only achieve leverage of its underwriting
  capital through purchasing Coinsurance ...

Various credits limit support to individual
countries
37
ATI Facilitated Transactions
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Increased Presence

• To increase market access to its risk mitigation
  products, ATI has undertaken to establish
  representative offices in selected Member States,
  including Zambia. This is being made possible
  with initial donor support of organisations like
  the EU, along with Govt

39
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]