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TRADE AND INDUSTRY PORTFOLIO COMMITTEE Dr R Davies
2 May 2001
EXPORT CREDIT AND FOREIGN INVESTMENTS RE-INSURANCE AMENDMENT BILL: BRIEFING
Documents handed out
Presentation by the Department on the Export Credit Agency (See Appendix)
TRADE AND INDUSTRY PORTFOLIO COMMITTEE
Dr R Davies
Export Credit and Foreign Investments Re-insurance Amendment Bill [B19-2001] (.pdf file)
The Export Credit and Foreign Investments Re-Insurance Amendment Bill empowers the Minister to enter into an agreement with the Export Credit Agency to insure certain contracts on behalf of Government. The Export Credit Agency will assume the responsibilities of the current Credit Guarantee Insurance Corporation.
The Export Credit Agency will be a government agency which will deal with commercial transactions. As such, the DP expressed concern that the Export Credit Agency would not stand apart from government interference. For example, a decision to take a commercial risk could be based on a political decision to suit government for some non-commercial reason.
In this regard the Department of Trade and Industry explained that the Export Credit Agency would be subject to the supervision of the Registrar of Insurance and the Registrar would not accept a risk that is not bankable.
Representatives from DTI were present. Mr Matthee (Chairperson of the Underwriting Credit Investment and Insurance unit in the DTI) made the presentation. Mr Strydom (legal advisor in the unit) was also present.
Summary of presentation
Mr Matthee emphasized the importance of Export Credit Agencies (ECAs) as instruments of policy. Mr Matthee added that the government needs an ECA to fill the gap which exists between the requirements of exporters for coverage of political and commercial risks and the willingness of the private market to underwrite these risks. Mr Matthee stated that the ECA will insure political and commercial risks and that the ECA will also stimulate exports in that the ECA will underwrite projects where as the private sector may be unwilling to accept risks involved in that project.
Mr Matthee explained that there is an International Union of Credit and Investment Insurers and that together they form the Berne Union. Mr Matthee added that there are many variations of the ECA model and that no model is flawless. Mr Matthee stipulated that ECA's differ from private sector insurers in that they will underwrite even if the break even period is fifteen years. This period is longer than the private sector will accept.
Mr Matthee explained that there is a sufficient level of ECA facilities available in the short term market but that increased facilities are necessary in the long-term market because there is a longer period of risk and the insurance required is more substantial. Furthermore, Mr Matthee explained that Capital export projects are large projects which are repaid between three to ten years. These projects are substantial foreign exchange earners and are beneficial because they create employment and also a wide range of subcontracts. Repayment risks are covered by ECAs. On this basis, Mr Matthee explained that Capital export projects will have particular value in the SADC context.
Mr Matthee stipulated that ECA experts have endorsed the establishment of an ECA.
The ECA will :
- try to strengthen the global competitiveness of SA exporters,
- assume CGICs (Credit Guarantee Insurance Corporation) responsibilities,
- resource itself to provide analysis of policy development,
- establish portfolio limits for support
Amongst other staff, the ECA will need a board of directors, a CEO, and a deputy CEO. DTI suggests that the agency should be subject to company and insurance law. This means that the Registrar of Insurance would provide some kind of supervision. The total ECA cost is expected to be approximately fifty percent of the CGIC Commission.
This marked the end of the presentation.
Mr Bruce (DP) asked why they would want to close down the old structure (the CGIC) simply to re-open a new one (the ECA). He also asked if the ECA would stand apart from government interference. Mr Matthee replied that generally the CGIC takes commercial risks. When it comes to project financing CGIC has never taken any political risks. Also, assessment of projects is not taking place at CGIC. DTI wants to create the expertise to analyse the risk. CGIC does not have this capacity. DTI has some underwriting skills and CGIC has some underwriting skills. However they need someone to manage these skills.
In the past exporters had no recourse to government. Exporters and banks would prefer the risk to be covered by government.
Dr Davies (ANC) asked if it is correct that CGIC is currently a private insurance company.
Mr Matthee replied that this is correct. Dr Davies commented that the Bill does not delineate the relationship between the Minister and the ECA. Mr Strydom added that the Chairperson was correct to say that the Bill did not provide for this separation and that the ECA will be an agent acting on behalf of Government.
Dr Davies pointed out that as it stands a future Minister would be able to go through another agency or even the CGIC. Mr Matthee agreed.
Mr Bruce said that the ECA is a government agency on the one hand but on the other hand they also deal with commercial transactions. He asked if there was a mechanism in the legislation to ensure that a decision to take a risk is a commercial decision rather than a political decision to suit government for some other reason.
Mr Matthee replied that the Agency would be subject to the supervision of the Registrar of Insurance. The Registrar will not accept a risk that is not bankable. Mr Matthee added that there will also be a committee within the ECA consisting of experts in relevant areas who will evaluate every transaction.
Mr Bruce asked if the Minister can overrule a decision to insure through the ECA if there was a difference of opinion as to whether a project should be underwritten or not. Mr Matthee replied that the Agency must have project criteria. Furthermore, the ECA would not fund a project such as MOZAL entirely with South African resources. Usually the ECA would require equity of approximately thirty five percent cash . The MOZAL requirement amounted to 50%. The ECA would also insist upon a feasibility study and would review the feasibility study.
Mr Bruce asked how they foresaw the Agency's functioning in the future.
The panel member replied that the Minister would appoint a CEO. Government will not subsidise the Agency, it will only give it a capital amount. The technical committee will consist of technical people. The technical committee will be responsible for recommending approval (or not) to the Board of Directors.
Mr Matthee went through the Amendment Bill and pointed out where various words and phrases have been inserted and deleted. Mr Matthee described subclause 2(a) as being the essence of the Bill as it enables the Minister to underwrite contracts on behalf of Government.
Dr Davies noted that the Department had consulted widely on the Bill. The deadline for submissions on the Bill is 9:00am on Wednesday, 9 May 2001.
EXPORT CREDIT AGENCY PRESENTATION
· Export Credit and Foreign Investment Reinsurance Act, 1957
· Minister of Trade and Industry contracted with CGIC
· Exporters, banks insured by CGIC
· CGIC reinsured by DTI
EXPORT CREDIT AGENCIES (ECAs)
· Play a central role in international trade and investment flows
· Insure political and commercial risks
· Insured / financed $410 billion in 1997
· No typical ECA
· Operate on account of government
· Dual mandate
- act as insurer of last resort
- break even
· ECA an instrument of policy in globalized economy
RATIONALE FOR ECAs
· Originally the stimulation of exports that would otherwise be foregone against a backdrop of private sector unwillingness to accept risks
· Principal rationale is to fill the gap between the expectations and requirements of exporters for the coverage of political and commercial risks and the willingness of the private insurance market to provide such cover
From 1982 to 1997
- Export value $ 5,6 trillion
- Claims paid $ 154 billion
- Recoveries $ 71 billion
- Premium $ 40 billion
At the end of 1997 exposure
- $ 515 billion
- $ 431 billion
long term export credit almost all to non-OECD countries
International Union of Credit and Investment Insurers
Berne Union Consensus
Many shapes, sizes
No perfect model
Some called insurers others eximbanks
Export credit guarantees and insurance do not involve provision of funds to exporter but safeguard export financing banks against losses resulting from transactions they finance
Export credit guarantee schemes are mandated and supported by government and adapted to local conditions. According to the International Trade Center UNCTAD / GATT, countries that lack such schemes put their exporters at a great disadvantage
ECAs DIFFER FROM PRIVATE SECTOR INSURERS
· Break even period long, longer than private sector would accept
· Official ECA's do not pay taxes
· Shareholders in official ECA's (governments) do not expect dividends
Short term versus Long term
- Conveyer belt approach
- Not untied finance
- Not so necessary
- Long horizon of risk
- High premiums (10%)
- Insurance more substantial
- Pre-completion (Exporter ) and Post-completion (bank)
DUAL MANDATE: PROMOTE EXPORTS / BREAK EVEN
WTO Agreement on Subsidies and Counter-vailing Measures require break even
This led to
- Higher premium rates
- Tougher underwriting
- Provisions for losses
Difference between claims and losses
- Different from normal insurance
- Recovery expectation 30% Commercial/ 100% political
CAPITAL PROJECTS CHARACTERISTICS
· Repaid over 3 to 10 years
· Substantial forex earners
· Secure markets for many years
· Two way Trade
· Repayment risks covered by ECA's
· Beneficial (Neutral to b.o.p.)
· Wide range of subcontracts
23 000 Jobs S.A.
9 000 Jobs Moz.
192 Contracts S.A.
20 Contracts Moz.
258 Contracts S.A.
RECENT TREND: PROJECT FINANCE
Traditional Security : Government or sovereign guarantee
Large defaults 1980's
Host governments unwilling to be guarantor
Increase in project financing
· main security viability of cash flow
Range of challenges
3 DECEMBER 1997 CABINET
· Noted value of Capital Export Projects especially in SADC context
· Endorsed DTI's support of repayment risks.
· Approved DTI's approach to be wold player
DEC 1997 JULY 2000
Reinsurance R 4 659 m R10 631 m
Inv. Guarantee R 38 m R 1 651 m
FRAGMENTED APPROVAL PROCESS
LACK OF DUE DILLIGENCE
FINDINGS OF AUSAID STUDY: MARCH - APRIL 2000
The overall export credit scheme requires updating.
All the costs, and all the income associated with export credit finance and reinsurance need to be centralized in one entity. This needs to include premium income, claims paid, interest make-up, earnings compensation payments, foreign exchange insurance premium income and net effects of Guaranteed Rates of Exchange.
The initiative of the DTI and the DoF to establish an Export Credit Agency should progress urgently. The ECA should be set up to administer the totality of Government's obligations under the ECFIR Act and any amendments flowing from review of the Scheme. This would include all aspects of management of premium income and claims, premium pricing policy, interest make-up compensation, the management of the foreign-exchange compensation account (FECA) and the GRE scheme.
The ECA should assume all responsibilities which CGIC has performed since 1957. The ECA should immediately resource itself to provide all necessary analysis of transaction portfolio analysis and policy development, and of policy for presentation to Government. The ECA to establish portfolio limits for support, by reinsurance or other forms, to cover country limits and transaction size limits.
ECA EXPERT RECOMMENDATIONS
· ENDORSED ECA ESTABLISHMENT
· CAPITALIZE ECA
· WITHDRAW FROM SHORT TERM
· Strives to strengthen the global competitiveness of SA exporters through sophisticated trade finance solutions
· Manages the totality of Government's obligations including premiums, claims, pricing, interest make-up, foreign exchange cover and guaranteed rates of exchange
· Assumes CGIC's responsibilities
· Resources itself
· Establish portfolio limits
· Total ECA cost Â±50% of CGIC COMMISSION
· SUPERVISION BY REGISTRAR OF INSURANCE would lessen contingent liability of reinsurance portfolio
· Portfolio diversification and strategic alliances will improve risk situation
· Investment of Reserve Fund
- Additional R50 million revenue
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