Export Credit and Foreign Investments Insurance Amendment Bill: finalisation

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SELECT COMMITTEE ON ECONOMIC AND FOREIGN AFFAIRS

SELECT COMMITTEE ON ECONOMIC AND FOREIGN AFFAIRS
19 August 2002
EXPORT CREDIT AND FOREIGN INVESTMENTS INSURANCE AMENDMENT BILL: CONSIDERATION AND FINALISATION

Chairperson:
Mr M V Moosa (ANC) [Gauteng]

Relevant documents
Export Credit and Foreign Investments Insurance Act, 78 of 1957, as amended
Export Credit and Foreign Investments Insurance Amendment Bill [B29B-2002] amended by NA

SUMMARY
The Committee was briefed on the Bill, and were informed that Clause 1(a) and (c) were introduced to replace the term "contract of insurance" with "policy of insurance", because the former was open to the undesirable interpretation that the Minister of Trade and Industry has to approve every transaction entered into by the ECIC and third parties. Clause 2(a) is also introduced to ensure the distinction between the contract entered into by the Minister and the ECIC, which details the transactional mandate of the ECIC, and the subsequent contracts then entered into by the ECIC with third parties, in terms of the mandate set out in the first contract. Clause 3 clarifies that the ECIC indemnifies a maximum of 90% of the total value of the contract or transaction value, and not 90% of the total loss. Clause 7 seeks to enact the retrospective operation of the Bill from 2 July 2001.

The discussion on the briefing focused largely on the effects of enacting the retrospectivity because it was not brought up throughout the drafting process, but was instead introduced at a later stage to the Trade and Industry Portfolio Committee in a piecemeal fashion. It is an extraordinary remedy, and thus needs concrete motivation for Parliament to approve it. Industry players stated that the foreign funders of the Mozal project indicated that they would back out of that project should retrospectivity not be effected, which means that a sound and financially viable project such as Mozal would be in default.

Clarification was also sought on the involvement of the Minister in the contracts concluded between the ECIC and a third party, the extent of the coverage of the political risk under Clause 3, the distinction drawn between commercial and political risk and the extent to which banks are required a portion of the risk associated with projects.

MINUTES
Briefing on Export Credit and Foreign Investments Insurance Bill
Dr Pat Kohlo, CEO of the Export Credit Insurance Agency, provided an introduction on the Bill by reading through its Memorandum.

Mr Johan Strydom, Senior Legal Advisor to the Department of Trade and Industry, engaged the Committee in a clause-by-clause analysis of the Bill.

Clause 1 proposes the deletion of the term "contract of insurance" currently contain in Section 2 of the principal Act. It is also proposed that the portion of Clause 2(a) in bold type be deleted, as that portion is the basis on which the legal opinions of two senior counsel were employed by the Department of Trade and Industry (the Department). They concluded that the current formulation of Section 2(1) of the principal Act does create and unintended impression with regard to the involvement of the Minister in the transactions entered into by the ECIC. The primary agreement between the Minister of Trade and Industry (the Minister) and the Export Credit Insurance ECIC (the ECIC), in which the Minister sets out the mandate of the ECIC, and the ECIC then has to enter into contracts on that basis. It thus becomes clear that two separate contracts are envisaged here: the first is between the Minister and the ECIC, and the second are those concluded by the ECIC in terms of the mandate set down by the first. The intention is therefore that, once the Minister has set the parameters of the mandate via the first contract, he does not have to intervene in the contracts subsequently entered into by the ECIC in terms of that mandate.

Legal counsel contended that this distinction is not accurately reflected in the legislation, but instead creates the impression that the intervention by the Minister does not stop with the initial agreement with the ECIC. The impression was also created that should any amendments need to be effected to subsequent agreements, they would have to be approved by the Minister, as intimated by the inclusion of the word "amends" in the Section 1 definition of the term "contract of insurance" in the principal Act.

Furthermore, the wording of Section 2(1) of the principal Act, contained in Clause 2(a) of the Bill, refers to "such terms and conditions as may, in consultation with the Minister of Finance, be prescribed in such agreements", and therefore creates scope for intervention by another Minister. The problem is that the current reading is open to the interpretation that it is not sufficient for the Minister to set out the parameters in the initial contract, because afterwards the terms and conditions contained in the contract and possible amendments would again require the Minister's intervention and approval.

The Minister himself had been been asked as to his position on this matter and he replied that big money is at stake here, and there is no room for uncertainty. Should legal counsel express concern here that the legislation has not achieved the clarification required, it then has to be rectified.

The Bill now proposes the deletion of a "contract of insurance" and introduces the "policy of insurance" via Clause 1(c), which almost draws a line between the ECIC's mandate in terms of its contract with the Minister and the policies of insurance entered into by the ECIC and business people. Clause 2(a) proposes that the portion contained in bold type be deleted and the underlined portion be inserted instead to clearly indicate the nexus with the policy of insurance. The Department believes that, should this reformulated provision be presented to the legal counsel, it would present no further problems, a it is now possible of only one interpretation.

Clause 1(b) merely officially changes the name of the ECIC to the Export Credit Insurance Corporation of South Africa Limited, and Clause 2(b) is a matter of semantics and consequential amendments.

Mr E Matthee, Export Credit Insurance Office, informed Members that Clause 3 deals with the percentage cover granted by the ECIC. There are many risks which the ECIC does not take, outlined in its policy document of approximately forty pages, and includes no documentation risk, which lie with the lender itself. But it does ensure against political risk, which is also clearly identified in its policy document. Section 3 of the principal Act currently provides that the Department can indemnify up to 90% of the loss, unless the Minister approves a higher percentage. Yet this has never happened in the past as the Department has never issued more than 90% of the loss. In fact, this has only transpired on one occasion, relating to a shipment of oranges by Outspan.

During 2001 it was decided that this Ministerial power should be done away with because it is not desirable to have incidences in which more than 90% of the loss is indemnified. Most are indemnified down to 85%, including Vodacom in Tanzania. Legal counsel contended that indemnifying political loss would not be wise, and it was therefore decided that the current wording be substituted with the current formulation in Clause 3 of the Bill, which now provides that a maximum of 90% of the total value of the contract or investment can be indemnified.

Mr Strydom stated that Clause 4 is a purely consequential amendment, with the word "contract" now becoming "policy" and "Agency" now becoming "Corporation".

Clause 5 seeks to repeal Section 8 of the principal Act in its entirety, which deals with the provision of administrative staff and personnel of the ECIC. Yet since the Bill now makes the ECIC a juristic entity independent of the Department, it is suggested that Section 8 be deleted as the Memorandum and Articles of Association of the ECIC adequately deals with this issue. There is thus no longer a reason for the retention of Section 8.

Clause 6 deals with further consequential and gender-sensitive amendments. Clause 7 concerns the short title, and also provides that the commencement date should be deemed to be 2 July 2001. The Department is aware that Parliament is not entitled to provide for retrospective commencement of this Bill should any person show that s/he is prejudiced by the retrospective commencement, but the Department contends that no-one would be so prejudiced. It was included to provide for the transitional arrangements between the previous company and the ECIC, and 2 July 2001 was decided on because it is the date on which the Export Credit and Foreign Investments Insurance Amendment Act came into operation. In order to avoid the creation of a vacuum here, the Bill should be deemed to come into operation on 2 July 2001.

Discussion
The Chair suggested that the retrospectivity issue is a problem, and he is not certain whether Parliament would want to effect such a request. Furthermore, this issue was not brought up in the drafting process, and seems to have only been introduced by the Department at the Trade and Industry Portfolio Committee meeting by way of suggestion in a piecemeal manner. This whole issue may then have received insufficient consideration, and was really only introduced after the Bill had been tabled. How much research has been conducted on this issue, and whether no-one would in fact suffer because of it?

Adv Gideon Hoon, State Law Advisor, stated that retrospectivity itself is not a problem as long as it does not prejudice anyone.

Mr Strydom agreed with the Chair that the President would have to be provided with concrete motivation for agreeing to this commencement date, and called on industry players to contribute in this regard.

Mr Jaco Kriek, IDC Executive Vice President: Projects, stated that retrospectivity has to be implemented because the investment in the Mozal project currently stands at R250m, which the ECIC has secured via foreign lenders. The situation is however based on the factual amendments and the draw downs have already taken place. It was possible to convince the German funders that these amendments were in the process of being effected but not so with the Japanese investors, who will only involve themselves once the amendments are effected.

The Chair requested additional clarity on this matter, because the interested parties are asking Parliament to do a very special thing. In fact, only one or two Acts since 1994 have been passed with retrospective effect, because it does upset the law.

Mr Greyling, Rand Merchant Bank, contended that the proposed amendments do not seek to amend the nature of the Act, but aim rather to clarify what has been the intention of the Act all along. It first arose under the new Amendment Act via the Mozal project, and this is the first instance in terms of which the new Act can be tested. It was agreed that legal counsel would be consulted for a legal opinion, and their findings confirmed the suspected uncertainty. The ECIC board cannot be bound to a facility while the legal opinion confirms uncertainty out there. The retrospectivity issue is thus a critical issue, because the Mozal policies were signed in December 2001, and the investment hinges on the implementation of the amendments.

The Chair asked whether the Mozal project is the only new project since 2 July 2002.

Dr Kohlo replied that nine other projects have since arisen, but added that the Deutsche Bank has made it clear that it would only fund the Mozal project if retrospectivity is effected.

Mr K Durr (ACDP) [Western Cape] stated that this is where the problem arises, because the presenters are saying that the Bill needs the Minister's intervention at every step of the policy, but this does not happen in practice because the Minister only gives consent to the original policy. The concern here is that this then brings into doubt the credibility of the subsequent policies entered into by the ECIC. Yet the proposed amendment seeks to amend the principal Act so that the Minister is no longer required to be party to the subsequent policies at all, and are further requesting Parliament to approve the amendment which would expose South African taxpayers to risk-contingency liability.

Mr Matthee replied that Mr Durr is confusing two matters here: the intervention by the Minister via Section 1 of the principal Act which needs approval to amend and, secondly, the percentage of cover in which the principal Act does not afford the Minister the power to intervene. With regard to the percentage of cover, the principal Act merely provided that the Minister could approve a higher percentage.

The Chair requested clarity on the nine contracts that have been entered into since 2 July 2002.

Mr Durr questioned the need for implementing retrospectivity if, as contended by Mr Mathee in response to his earlier question, there is no risk attached. Furthermore, what is the precise extent of the involvement of the Minister here?

Mr L Lever (DP) (North-West) requested clarity on the precise date on which the Mozal contract came into operation, so as to ensure that it does not predate 2 July 2001. Furthermore, it has been said that no-one is prejudiced by the retrospectivity as is currently formulated, but it does create another risk for the fiscus and requires amendment to policies in which the Minister should have intervened.

Mr Matthee informed Members that eighty projects have been reflected on the ECIC books since 2 July 2002.

The Chair asked whether any of these eighty projects have had to be amended since then.

Mr Matthee answered in the negative.

The Chair asked whether the have been any amendments, since 2 July 2001, to the nine projects referred to earlier.

Mr Matthee answered in the affirmative, and added that they are now more secure than ever before because they are now more onerous on businesses.

The Chair questioned whether it is being contended that the retrospectivity would decrease the risk because, under the current situation, some clauses in the policies would come under attack on the grounds that the Minister has not applied his mind to each one of them in turn.

Mr Matthee replied that this applies to those in which 100% of 85% of the political risk is covered.

The Chair asked how exactly commercial and political risk is identified, as the legislation does not contain a proper definition of these terms.

Mr Matthee responded that the ECIC wants to ensure that 100% of 85% if it benefits the country, and wants the foreign banks to obtain cover from their Export Credit Authority (ECA) for a solid project. Such a product would also leverage cheaper rates than the Minister of Finance would ever be able to borrow, as its finances are cheaper than its expenses. A good example here would be the Mozal One project, which is paying back higher interest rates than its expenses. The project must be financially viable before the ECIC can jump on board, and various measures are employed to ensure the risks are covered. The banks are forced to take on the commercial risks.

Mr Lever requested the delegation to outline the direct consequences should the Bill not be made to operate retrospectively, as well as the possible costs and liability involved here.

Dr Kohlo replied that as far as the Mozal project is concerned, if the Bill is not made retrospective, the Mozal investment would be in default and R250m would not be made available to that project. The total costs calculation, as an estimate, would be R1b. At the moment the ECIC does have a revenue interest in the project which would be adversely affected should the retrospectivity not be effected.

Ms Rekha Ramcharan, ABSA Legal Advisor, added that it also affects ABSA Bank if the project were to default, which would most likely be the case should retrospectivity not be introduced. The result would be that the investment would have to be called back when it has already been committed.

The Chair asked Ms Ramcharan whether she is suggesting that the bank would be prejudiced should the project not proceed.

Ms Ramcharan answered in the affirmative.

The Chair stated that this does assist in clearing a case for effecting retrospectivity, but the question which then remains is why it was introduced at such a late stage of the proceedings.

Dr Kohlo replied that the tabled Bill's omission of this was a typo.

The Chair stated that the general rule in processing a Bill is that it would ultimately come into operation on the date on which it is signed, in this case it would be in 2002. The drafting team has had time to identify the issues and objects of the Bill, and thus an important a matter as retrospectivity should have been specifically included. It seems that attempts are being made to include it in the Bill as an afterthought.

Mr Durr asked whether it is no longer a requirement here for the Minister to sign off on the transactions.

Dr Kohlo answered in the affirmative.

Mr Greyling contended that this matter has been cleared up, and the Minister does not have to sign off on every transaction. Yet the problem was that the previous formulation was open to the interpretation that the Minister had to sign off on each transaction entered into by the Agency.

Mr Strydom conceded that retrospectivity has been introduced at a late stage because, when the drafters convened in Pretoria to thrash out the issues, he lost sight of retrospectivity because it was not part of his frame of mind at that time. The oversight was only discovered at a later stage, and the drafters are trying to remedy the mistake by now submitting the request to Parliament. All are aware that approval first has to be received from Parliament to effect this change, and it was then decided to approach the Portfolio Committee to introduce retrospectivity.

The Chair thanked Mr Strydom for responding frankly. The concerns with foreign risk have now been adequately addressed, as Members have been informed that the Minister would give the ECIC a broad mandate in terms of which it would then enter into transactions with third parties.

Mr Durr stated that he is not opposed to this, but requested Mr Strydom to direct Members to the actual provisions in the Bill detailing the Minister's involvement in the Bill.

Mr Strydom referred to Clause 2(a) of the Bill which provides that both the Minister and the Minister of Finance "shall enter into an agreement with the Corporation", and this thus indicates the Minister's involvement. It is therefore important to spell out, at the outset, the mandate of the ECIC.

The Chair contended that Clause 3 puts the government at a potential risk.

Mr R Nogumela (ANC) [Eastern Cape] requested clarity on the 90% indemnification, as government covers 100% of the 90% of the political risk. This is especially important if one considers that in Africa especially it is not certain what could happen next that could affect the political climate. What percentage of the risk then, would be accepted by the banks?

The Chair replied that banks would not accept any portion of the risk involved, as the project itself would take the remaining 10% of the political risk.

Mr Durr added that the government would not take all the risk, but would lay off a portion of it.

Dr Kohlo responded that the process of laying off some of the risk would occur, but contended that risk is what the business is all about. What has to be ensured however is that the benefits outweigh the risk, and the ECA's are consulted in this regard.

The Chair contended that, as stated earlier by Mr Nogumela, the banks would be laying off funds for the project and would be doing so at a premium, yet they are not accepting any of the risk. Surely this seems unjust?

Mr Nogumela added that he appreciates the response given by Dr Kohlo, but every sector is engaged in this practice.

Ms Ramcharan replied that the banks would get a low return on their investment in the project, and banks cannot be required to carry the political risk in a country in which the bank has no presence. It can, however, be expected of the political party of the country to bear this risk.

The Chair requested further clarity on the exact rate.

Ms Ramcharan replied that this varies, but the Mozal figures are currently at eighty basis points, which is less than one percent. No bank would offer this low rate.

Mr Greyling added that the ECIC is in the business of insuring against political risk and does charge a fairly hefty premium on the risk it takes. The ECIC is also the proper entity to accept this risk. Furthermore, the key players in this industry are critically placed to benefit the South African export industry.

Mr Kriek stated that, of the nine projects mentioned earlier, Mozal alone has been insured for a 100% of 85% of South African contract value for both political and commercial risk because the banks alone cannot provide cover for all aspects. The Mozal project is a well structured project and involves major international players. As stated earlier by Ms Ramcharan, banks do insure against commercial risk because it calculates the financial amount of the risk involved in commercial transaction, but it is not possible to do the same with regard to political risks.

Mr Durr requested further clarity regarding the proposed deletion of Section 8 of the principal Act and, especially, what does that section contain that warrants its deletion? Should it be deleted, the Minister would no longer be able to decide on the remuneration of the ECIC board, and it would be able to decide its own salary structure.

Mr Matthee responded that Section 8 is not the accepted practice, because the Minister can appoint the board and the CEO in terms of the PFMA. The remuneration has to be approved by the Minister in consultation with the Minister of Finance, even without Section 8.

Mr Durr accepted the explanation offered.

The Chair read the Motion of Desirability.

Mr Durr asked whether the Minister himself has been consulted on the processing of the Bill.

The Chair replied that the Minister has stated that the Committee has "to do what is necessary to bed down Mozal".

Dr Kohla agreed that the Minister has not expressed any problems here.

The Chair noted that the Committee reports the Bill, without amendments, to the National Assembly.

There were no further questions or comments, and the meeting was adjourned.

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