Export Credit Insurance Corporation 2018/19 Annual Report & 2019/20 Quarter 1 performance

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Trade, Industry and Competition

23 October 2019
Chairperson: Mr D Nkosi (ANC)
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Meeting Summary

Annual Reports 2018/2019
Export Credit and Foreign Investments Insurance Act, 1957
Export Credit and Foreign Investments Insurance Amendment Act, 2002

The Export Credit Insurance Corporation (ECIC) achieved a clean audit opinion for 2018/19. This was an improvement from 2017/18, where an unqualified audit opinion was received. The finding related to an accounting policy note which was corrected to reflect the approach correctly accounted for in accordance with the International Financial Reporting Standards. As such, this specific finding was addressed.

The ECIC indicated that it had derived its 2018/19 annual targets from its 11 strategic objectives; the entity managed to achieve all of them, with the advancement of transformation still having the most notable room for improvement. The entity grew its financial assets to about R7.4 billion and had total equity of R5 billion; its total insured value was up to R30 billion, as at FY18/19 end. The gross written premiums for the year amounted to R154 million while the underwriting profit was R623 million. This resulted in a solvency ratio of 249%. The entity achieved a clean audit opinion for 2018/19. This was an improvement from 2017/18, where an unqualified audit opinion was received.

The ECIC, indicated that in the first quarter of FY19/20 the entity managed to get its training plan approved by the executive committee. In the same period, the budget for the potential claims for underwriting profit, which had not occurred, was R195.25 million but the actual claims amounted to only R88.713 million. The operating expenses were R29.6 million; 9% lower than what was anticipated.

The Members were concerned about the extent of the inclusion of women in senior management and the Board. They said that they hoped that the current executive would equip and empower women within the organisation for senior management positions – considering the policy of government on gender equity. Members highlighted the importance of transforming the institution of the entity through elevating the statutory BBBEE policy and asked why the entity did not achieve the target that related this policy. Members asked about the establishment of an Exim Bank in South Africa, what role would the DTI play and how this would this affect SA’s shareholding at the Afreximbank.

Members further asked about the LNG project and how the country could benefit from this as well as how the entity’s risk model interacted with the sovereign ratings downgrading.

Meeting report

Briefing by Export Credit Insurance Corporation (ECIC)

Mr Kutoane Kutoane, Chief Executive Officer, ECIC, indicated that the entity had derived its 2018/19 annual targets from its 11 strategic objectives. The entity managed to achieve all of them, with the advancement of transformation still having the most notable room for improvement. The entity grew its financial assets to about R7.4 billion and had total equity of R5 billion; its total insured value was up to R30 billion, as at FY18/19 end. The gross written premiums for the year amounted to R154 million while the underwriting profit was R623 million. This resulted in a solvency ratio of 249%.
Mr Kutoane indicated that the ECIC achieved a clean audit opinion for 2018/19. This was an improvement from 2017/18, where an unqualified audit opinion was received. The finding related to an accounting policy note which was corrected to reflect the approach correctly accounted for in accordance with the International Financial Reporting Standards (IFRS). As such, this specific finding was addressed.

Mr Kutoane indicated that the ECIC legislation was currently under review with the Department of Trade and Industry (DTI) for the extension of the entity’s mandate and establishment of an SA Export Import (Exim) Bank. The expansion of the mandate and the creation of an Exim bank would require new technical trade finance skills and systems, considering the entry into the Fourth Industrial Revolution (4IR). The formal determination of underwriting capacity would be dealt with under the revised ECIC legislation.

Mr Kutoane said that the partnership with African Export Import Bank (Afreximbank) allowed for risk-sharing and collaborative research to share knowledge and identify trade and investment opportunities on the continent. The investment also provided new business opportunities, including deal origination that supported local exports into the rest of Africa. There was also an identified need for the sourcing of skills to those that currently existed within the entity; and the opportunity to second staff to Afreximbank to collaborate on knowledge sharing and skills development.

Mr Kutoane explained that the Interest Make-Up (IMU) grant received from the DTI was taxed while the expenditure was not deductible. The matter was being finalised with rescheduling under section 11 of the Income Tax Act. The ECIC operations were US dollar-based while tax calculation was Rand-based, resulting in volatile and unfavourable tax assessments.

Mr Warren Koen, Acting Chief Financial Officer, ECIC, indicated that in the first quarter (Q1) of FY19/20 the entity managed to get its training plan approved by the executive committee (EXCO). The first research report on two research projects was presented to EXCO. The business process improvement plan was 70% implemented.  However, the strategic partnership plan had not been approved because the plan was referred to another business unit within the entity.

Mr Koen indicated that for Q1 the entity obtained R34.577 million for written premiums - a 350% variance from the budgeted ones. The budget for the potential claims for underwriting profit, which had not occurred, was R195.25 million but the actual claims amounted to only R88.713 million. The operating expenses were R29.6 million; 9% lower than what was anticipated.

Discussion

Mr F Mulder (FF+) said that the exports and imports would have an impact on the entity’s premium income. It seemed as though imports were more than ever. Which form of trade would be most beneficial and imposes less risk, imports or exports?

Mr Mulder asked if the entity had any private sector competition, both locally and internationally, or within the public sector.

Ms T Mantashe (ANC) appreciated the presentation and commended the entity on its stupendous excellence.

Ms Mantashe expressed concern that the entity’s delegation only consisted of men. She hoped that the current executive management would equip and empower women within the organisation for senior management positions – considering the policy of government on gender equity. She encouraged the entity to develop a succession plan for potential candidates who would replace the current leadership.

Ms Mantashe expressed concern about the old Act that was currently governing the entity; the Committee would plead that the Department consider amending it.

Ms Y Yako (EFF) appreciated the entity had clean audit opinion from the AG and that the entity was considering the establishment of an Exim bank, which would stimulate the export market. She asked what role the South African Reserve Bank (SARB) was playing in making it easier for small and medium exporters to trade with other countries. What are the challenges that the entity experiencing with local banks and which of them are supporting the entity in helping exporters trade without the burden of capital interest? How often do trade finance commissions change and how does this affect emerging exporters?

Ms Yako supported Ms Mantashe’s view about the inclusion of women. She reckoned that women were being excluded from the trade economy; this was sometimes purposefully so – especially to women from previously disadvantaged backgrounds. They were not sufficiently appreciated enough for the work they do. Women who were experienced in trade finance were not getting access into certain corporate spaces. At some point, women would have to be at the forefront of this industry and it could not be a boys’ club for much longer.

Ms Yako asked why the focus of the entity was limited to capital goods. Is the entity interested in exploring other sectors as well? Is the interest rate of the entity competitive to other banks?

Mr S Mbuyane (ANC) asked if the entity had partners and asked for the shareholder profile.

Mr Mbuyane highlighted the importance of transforming the entity through elevating the statutory BBBEE policy and asked why the entity did not achieve the target that related this policy.

Mr Mbuyane supported Ms Mantashe’s suggestion to amend the Act.

Mr Mbuyane asked the entity to describe its programme for assisting on small and medium exports henceforth.

Ms N Motaung (ANC) echoed the other Members’ views on female representation, saying that it was an important social issue that needed to be addressed.

Ms Motaung asked what the entity’s relationship was with Invest SA.

Ms Motaung asked how the entity implemented its awareness programme to reach people from disadvantaged communities.

Ms J Hermans (ANC) said it was refreshing to receive a presentation of such a high calibre. It was pleasant to witness growth in the industry even though the national economy was struggling.

Ms Hermans asked how the entity would improve on the targets it had not met. She recounted that during the State of the Nation Address (SONA), the President had mentioned the government’s plans for procurement and targeting youth employment. The entity should therefore be giving an update to the Committee about its progress towards achieving this goal.

Ms Hermans sked about the establishment of an Exim Bank in South Africa. How would this affect SA’s shareholding at the Afreximbank? She reckoned that it seemed like SA would be competing in the same market by operating within the same continent.

Ms Hermans asked how the entity determined its premiums. What factors does the entity consider?

The Chairperson informed Members that the ECIC delegation had communicated apologies from the entity’s executive management; two of them were females.

The Chairperson asked what motivated the entity to introduce the changes expressed in the strategic objectives outlined for FY19/20.

The Chairperson asked if the entity’s cover was only “government-backed” or if it also had private sector support.

The Chairperson asked what role the DTI played in the ECIC’s mandate review and the establishment of an Exim Bank in SA.

Mr D Macpherson (DA) asked the entity to submit a breakdown of its clientele profile - their market exposure and the industries they were each involved in.

Mr Macpherson agreed that the biggest stress to the entity’s business was a downgrade to its sovereign ratings. He then asked how the entity’s risk model interacted with the sovereign ratings downgrading. How does the downgrade affect the entity’s financial statements? He reckoned that the response to these questions would be lengthy and would require modelling; he asked the entity to submit it in writing.

Mr Macpherson expressed that the delegation was probably demoralised by being bombarded with nonfactual commentary about female representation within its organisation structure. The throwaway comments such as “boys’ club” were inappropriate. He added he was not dismissing the importance of gender equity.

Ms Yako interjected and disagreed with Mr Macpherson’s statement, saying that he was dismissing the importance of gender equity.

An argument ensued between Ms Yako, Ms Mantashe and Mr Macpherson.

The Chairperson ruled that the meeting was not the platform for such a discussion. He ordered the Members to cease the argument and engage on the topic. He told Mr Macpherson to keep decorum in the manner he communicates and he should be considerate of other Members’ views. The social issue of gender equity was a crucial one and needed to be addressed.

Mr Dheven Dharmalingam, Board Chairperson, ECIC, acknowledged that the entity could do better in managing the Board representation at its meetings with the Committee. He indicated that the ECIC Board consisted of nine members – one executive and eight non-executive directors, of which five were females. The Board had asked the DTI to appoint the current CFO, Ms Noluthando Mkhathazo, as the 10th Board member. The Board would then have two executive directors. The entity already had a 51% female staff representation. Most of the entity’s subcommittees were already being chaired by females. As part of the succession plan, the entity planned to eventually have a female CEO and Chairperson. The entity was definitely not a “boys’ club” and was committed to gender and racial transformation.

Mr Dharmalingam indicated that the entity was a level four BBBEE company and had developed a strategy towards attaining level one. The entity had a level one score in BEE compliance for all areas of the company but the shortfall was supply and development – with the biggest cost drivers being rental fees and asset managers’ wage bills.

Mr Dharmalingam indicated that pages 46-60 of the entity’s integrated report included a detailed breakdown of all the projects underwritten by the entity; this included the current status and a demonstration of the impact of each project in job creation and on the entire African continent.

Mr Dharmalingam said that entity only looked to operate where there was market failure and opportunity for capital goods and major project; it did not compete with the credit insurers in the private sector but with foreign investors, manufacturers and bankers. The entity’s goal was to support South African manufacturers whose products had at least 50% of local content, against the global market.

Mr Kutoane explained that the economic performance (in terms of public debt position, balance of payments, national governance conditions, GDP growth rate, etc.) of the countries which were destinations for SA exports influenced the demand of those countries for SA exports. The entity supported exports more than imports and insured exporters against economic and political risk against these countries. The private sector could not quantify and model political risk due to its dependence on international relations; this was why the ECIC worked very closely with the Department of International Relations and Cooperation (DIRCO) to handle such non-marketable risks.

Mr Kutoane said that the premium levels of the entity were determined by the level of SA exports – the foreign demand for SA goods and services. The higher the risk exposure, the higher the premiums were.

Mr Kutoane said that the entity only supported exports with a 50% minimum of local content. Other export credit agencies were competing with the ECIC by allowing content as low as 30% because they recognised the multi-sourcing global supply chain belt; the ECIC was serving the best interests of the exporters and not as focused on its rate of returns.

Mr Kutoane explained that moving from focusing on capital goods and services towards an Exim Bank would require certain strategic imports to be enabled to come into SA through import financing. There were factors to consider concerning the trade relations between the two countries, specific dispensations for intermediate goods and services as well as the application of the rules of origin on trades.

Mr Dharmalingam indicated that the Board had engaged the Director-General (DG) of DTI and the previous Minister on the relevance of the entity’s governing Act, from a 4IR perspective. The Board presented to the DG that in order for an Exim Bank to be established in SA, there would have to be a legislation drawn up to mandate it. There would also have to be a different team - mostly specialising in trade finance – and a different Board. The entity was happy to assist the Department with the drafting of the legislation.

Mr Dharmalingam said that SARB was not directly imposing any limitations on exporters but the reality was that a black small and medium enterprise (SME) stood no chance of getting exorbitant funding. An Exim Bank would be the solution to support such SMEs.

Mr Kutoane explained that the Exim Bank would support imports into SA from other African countries. Together with the existing Afreximbank, it would jointly support intra-Africa trade.

Mr Kutoane indicated that the entity had capacitated and trained its current CFO from being just an operator to her CFO post within eight years. The ECIC had also mentored and funded a lady from the beginning of her tertiary education all the way to becoming a fully qualified actuary, while she was working for the entity. A total of 10 students were fully funded and had now completed their studies; eight of them continued into postgraduate studies and the other two entered the job market.

Mr Kutoane explained that the entity’s relationship with the SARB was only on two levels: the institution provided foreign exchange rulings and was empowered by the Prudential Authority to be the regulator. The regulation was based on monitoring the ECIC’s capital management to ensure solvency adequacy. The SA Exim Bank would not be regulated by the SARB because it would not be able to optimal play its developmental role; it would have to be governed by its own statutes through institutions like the National Treasury (NT).

Mr Kutoane said that capital goods had to be primary focus of the entity because of the assumed capability of the private sector to deal with merchandise exports within short-term duration. It was now clear that the commercial banks were unable to fill the trade financing gap within the continent; there was a need for a government support mechanism in the form of an Exim Bank.

Mr Kutoane indicated that the entity had a target of achieving a level three BBBEE score. The entity managed to achieve level two and it was still striving towards achieving level one. This would be facilitated by the entity’s transformation strategy, mostly focusing on transforming the supply and development unit of the entity.

Mr Dharmalingam explained that the government guarantee was not supplied to the ECIC; the entity had not had reason to request it. The key element with the entity was the sum insured – the cumulative amount of risk underwritten by the business. NT mistakenly believed that the sum insurance was a liability. However, the actual actuarial risk does not equal the sum but was based on an actuarial model.

Mr Dharmalingam proposed that the entity must underwrite the Liquid Natural Gas (LNG) project that was ongoing in Mozambique. That would be an opportune investment for SA as well – it would have immediate benefits such as job creation and exports for SA. The project had the potential of being amongst the biggest projects ever undertaken. The annuity benefit of the project would become a revenue generator for the next 100 years. The sum insured that the entity would undertake would be about $USD1 billion (~R15 billion) if it would underwrite the LNG project and the SA Exim Bank. However, the actual liability might only be about R1 billion.

Mr Kutoane indicated that the entity was updating its feasibility study conducted in 2017, on the formation of an SA Exim Bank. The policy framework paper for the bank would be finalised soon and would form the basis of the new legislation. It would be submitted to the DTI and a workshop would be held for it. Concept legislation would then be drafted and discussed with other key stakeholders such as the IDC and PIC, including the discussion of the institution’s capital structure. This process would hopefully be concluded within the next year.

Mr Macpherson agreed with Mr Dharmalingam about the LNG project. He reckoned it that would certainly be the biggest capitalisation project in modern history. It would be inopportune for SA to not benefit from it. He asked the entity to shed some guiding light for the Committee about what it should start thinking about in order to take advantage of the project, considering that trade investment was a key cornerstone of the Committee’s oversight mandate? How can the Committee help the entity to maximise its action plans in getting involved in the project, for the benefit of SA’s export market and economy in general?

Mr Mbuyane asked what the ECIC was proposing to align the old Act with the entity’s current programmes henceforth. He also asked what public awareness programmes the entity was rolling out to improve its footprint.

Mr Mbuyane asked about the entity’s relationship with Invest SA.

Mr Dharmalingam explained that the Board, through developing extensive actuarial risk models and reviewing its balance sheets, found that the entity could afford to underwrite an amount of $USD1 billion for the LNG project. The main cause for concern, from a market perspective, was the associated concentration risk. The major bankers funding the project would consider the government guarantees and sovereign ratings to determine if they were prepared to allow ECIC to underwrite the investment. The entity had since approached the banks to present the viability of the project.

Mr Kutoane indicated that there were two initiatives run by the DTI: Invest SA, which facilitated direct foreign investment into SA and Trade and Investment South Africa (TISA), which promoted SA cross-border investment and export trade. The ECIC worked very closely with these initiatives – travelling and doing joint exhibitions across Africa.

The entity had started intensifying how it disseminated information about its role, targeting specific platforms such as industry conferences. The entity planned to improve its strategy for this purpose and engage the committee as well as principals in government on their position and how they could help fast-track the ongoing projects.

Mr Stefanus Botes, Director: TISA, DTI, said the unit was about two years old. It was working towards leading an investment-led, trade promotion approach into Africa. The ECIC had been working closely with the unit.

Mr Botes indicated that DTI had recently had a meeting with the NT concerning the taxing of the IMU grant issued by the DTI to the ECIC. NT advised the Department to write to the DG of NT to raise the need to classify the matter as a grant by NT, in terms of the Income Tax Act, and not a transfer of payment. The impression by NT was that this classification would be considered in the future but the tax that had already been paid would not be repatriated.

Mr Dharmalingam said that the entity had great leadership, despite the fact it was one of the most technically challenging entities within SA, and needed to be supported. There was a huge element of risk in the project that it underwrote and the expertise required to model these risks was intensive and elite. The transformation agenda was important and also needed to be addressed – the entity just needed the right level of governance to function optimally and realise it.

The meeting was adjourned.

 

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