Export Credit and Foreign Investments Re-Insurance Amendment Bill: Public Hearing

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Trade and Industry

14 May 2001
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Meeting report

TRADE & INDUSTRY PORTFOLIO COMMITTEE
15 May 2001
EXPORT CREDIT AND FOREIGN INVESTMENT RE-INSURANCE AMENDMENT BILL: PUBLIC HEARINGS
 


Relevant Documents
Credit Guarantee Insurance Corporation of Africa's submission (see Appendix)
 

Export Credit & Foreign Investment Re-insurance Amendment Bill [B19-01]

SUMMARY
Various stakeholders raised concerns relating to the governments decision to convert CIGC into a parastatal and to establish the ECA as a monopoly. DTI (Department of Trade and Industry) argued that the government was merely filling a void that had been left by the private sector and that the government was not intending to compete with the private sector. DTI assured the committee that ECA would be fully operational by July this year.

The committee was informed that due to the unstable political situation in Zimbabwe, currently there was no underwriting for short-term political risk. Parties raised the issue of constitutionality for S (2)(a) and S 11(2) of the draft Re-Insurance Bill. The department contended that S 2 (a) had no constitutional implications. With regard to S 11(2), DTI conceded that there could be serious legal implications in the transfer of the existing re-insurance contracts from CIGC to ECA, which would assume the character of a parastatal. DTI confirmed that it would reconsider S 11(2).

MINUTES
The Chair informed the committee that only the Credit Guarantee Insurance Corporation of Africa had submitted comment to the committee.

Presentation
Credit Guarantee Insurance Corporation of Africa submission
Mr C Leisewitz, Managing Director CIGC, made the submission.

Mr Leisewitz argued that international competition required the South African Re-Insurance Scheme to make fast decisions at a reduced cost. Mr Leisewitz was concerned that the conversion of the CIGC into a parastatal might cause undue delay in making urgent and often sensitive commercial insurance decisions. Mr Leisewitz added that endless consultations as a result of government involvement would result in slower business transactions.

Mr Leisewitz doubted that the newly created Export Credit Agency would be able to commence operations by July this year. DTI contested this point and assured the committee that thorough research had revealed that the ECA would be fully operational by July.

Mr Leisewitz noted that government risk exposure would not change although ECA would be a government monopoly. Mr Leisewitz continued by affirming that the South African Scheme had produced good results compared to major international export credit insurers, because the scheme had been well managed. Mr Leisewitz highlighted that his agency had not recommended the creation of a parastatal at all and questioned the government's decision to establish the parastatal ECA at this point in time.

Mr Leisewitz observed that the largest schemes are managed by the private sector and that the trend towards privatisation continues. Mr Leisewitz questioned the constitutionality of S 2 (a), which, he argued, insists that all contracts with potential monetary risk be insured. Mr Leisewitz also queried the legality of S 11(2) that would effect change to existing re-insurance contracts without considering the views of the other parties to the re-insurance contracts.

DiscussionDr Davies (ANC) sought to know whether the ECA had given any profits to the government. Mr Leisewitz replied in the affirmative. Mr Leisewitz explained that CIGC underwrites short-term political risks and that CIGC did not have a policy of claims reservation like other insurance companies. Instead, continued Mr Leisewitz, CIGC operated strictly on a cash basis and therefore it had no need to put in outside money. Mr Leisewitz referred the committee to page 5 of the presentations, which delineated the business profile of the agency.

Mr Matthee (DTI) responded to Mr Leisewitz's contention that the ECA would not be operational by July 2001 and informed the committee that offices had already been rented at the Financial Services Board (FSB) where the ECA would move at the end of May. The Minister, Mr Matthee added, had set up the final committee and that all instruments and structures necessary for the ECA's operation were in place.

Dr Davies asked whether the ECA operating as a parastatal, would be more efficient in a business environment dominated by the private sector. Mr Leisewitz responded that it was not possible to tell whether the ECA would be more or less efficient at this stage.

Mr Frolic (UDM) asked how CIGC had managed to operate as a monopoly considering the movement towards business liberalisation. Mr Leisewitz explained that business underwritten by CIGC was very small and restrictive. Hence, Mr Leisewitz continued, the players in the market decided to appoint one agency to specialise and underwrite this market.

In response to Ms Hajaij (ANC), Mr Leisewitz acknowledged that there were instances where CIGC realised substantial profits but added that the agency had incurred losses too. Mr Leisewitz argued that the realisation of profits or losses was dependent on the types of projects underwritten by the agency. Mr Leisewitz responded to Mr Floric's query and said that he could not speculate on the governments decision not to privatise the ECA since privatisation was purely a political decision.

Mr Rasmeni (ANC) sought clarification on the issue of the constitutionality of S 2 (a). Mr Leisewitz replied that the views he gave were personal and not those of an expert. Mr Strydom (DTI) agreed that S (2)(a) bordered on the issue of constitutionality but argued that it was not altogether unconstitutional. Mr Strydom highlighted that the language of S (2)(a) was not mandatory since "may" was a permissive term and indicated that there was no intention to compel persons to insure the relevant contracts. Mr Strydom pointed out that even if the Minister were obliged to compel, it was an objective and therefore no trader would be compelled to insure with the ECA.

As regards S 11(2), Mr Strydom admitted that the conversion of the CIGC to a parastatal had serious legal implications. Mr Strydom asked the committee for time to consult before reporting back to the committee.

Ms September (ANC) inquired as to the fate of the Mozal project now that the ECA had become a parastatal. Mr Leisewitz replied that CIGC was deeply involved in phase I of Mozal and that ECA would continue with phase II of the Mozal project.

Mrs Mohamed (ANC) asked why there was not any private underwriting for projects in Zimbabwe. Mr Leisewitz responded that this was a result of the fluid political environment in Zimbabwe. Mr Matthee added that exports to Zimbabwe were currently covered under a risk operated on the national interest account.

The Chair concluded the meeting by saying that deliberations would be continued on the 16th May 2001 and that the next meeting would determine the question of desirability after which a motion on desirability would be adapted.

The meeting was adjourned.

Appendix 1:
CREDIT GUARANTEE INSURANCE CORPORATION OF AFRICA LTD
PRESENTATION BY C LEISEWITZ (Managing Director) concerning the
EXPORT CREDIT AND FOREIGN INVESTMENTS RE-INSURANCE AMENDMENT BILL


EXECUTIVE SUMMARY.
1. Brief history:

· The Export Credit Insurance Scheme was started in 1957
· The Scheme has been administered through a partnership between Government and Credit Guarantee.
· Political risks have been re-insured by Government since the inception.
· Credit Guarantee carries the commercial risks and provides the underwriting and administration service.
· When the Scheme began to accept medium/long-term credit risks Government also accepted the commercial risks resulting from this business because such risks cannot be placed with the private market.
· The Scheme has been very successful for all parties concerned, the exporters, Government and Credit Guarantee.

2. Changes in the private sector re-insurance market:
· The private sector is now also able to accept most short-term political risks.

3. Change in South Africa's exports:
· Exports sold on medium/long-term credit have grown since 1994 but have become considerably more risky.
· International competition requires faster decision making from the South African Scheme and reduced finance costs.

4. Credit Guarantee's recommendation of September 1999:
· All the recommendations made seem to have been taken up in the Amendment Bill except that:
- We did not recommend the establishment of a new parastatal ECA to take over this business and
- We did recommend that Government should continue to provide political risk re-insurance facilities in the "national interest" for short-term exports that cannot be covered by the private market. This matter, which is vital for continued exports to many African countries, has not been addressed at all.

5. Credit Guarantee's present involvement:
· Credit Guarantee accepts and negotiates all applications for export credits.
· It evaluates the applications from a credit risk point of view and submits a report together with its recommendations to the Re-insurance Committee (DTI, Treasury, Dept. of Foreign Affaires and SARB).
· It executes the decisions of the Committee.
· It administers the resulting policies, collects premiums and attends to any amendments to policies that may be necessary.
· It vets claims, reports on them to the Committee and executes the Committee's decisions.
· Credit Guarantee prepares economic country reports for the committee and makes recommendations concerning premium rating, policy wordings and cover details.
· It prepares progress reports and statistics for the Committee.
· Credit Guarantee is remunerated by way of a 15% commission on premiums paid. The average annual commission over the past 10 years has amounted to R7,5 million.

6. Comments concerning the new Bill:
· The South African Government will have to remain the insurer of last resort because of the ECA's limited financial resources.
· The new ECA seems to have considerable powers without having to refer to any other organ within Government.
· Section 2 of the new Bill appears to have two ambiguities:
- The Minister will not insure an insurance company and
- It should not be compulsory for an exporter to insure all or part of his medium/long-term exports with the ECA.
· We question the legality of the provisions of paragraph 11
· The Bill is flawed in that it does not address the issue of insurance/re-insurance of short-term political risks in the "National Interest".

7. Comments on the Memorandum attached to the Bill:
· The new ECA will be a Government monopoly - Credit Guarantee is owned by the major banks and insurance companies.
· Government's risk exposure will not change.
· The South African Scheme has produced good results compared to the major international export credit insurers, proving that it has been well run.
· Whether the new ECA will be able to perform better must be shown by future results.
· It is questionable as to whether it is "best international practice" to establish a parastatal ECA. The largest schemes are managed by private enterprise and the trend towards privatizing is continuing.
· A new ECA is not needed in order to diversify the risk portfolio and/or to establish a reserve fund.
· Banks and exporters have not much option but to support the new ECA.
· It is doubtful that the new ECA can make a 50% saving on the commission costs.
· Will the new ECA be able to take over as from 1 July and if not what support can exporters count on?
· The establishment of a parastatal ECA is against Government's stated policy of privatization.


1. Brief history of export credit insurance in South Africa.
· In the early 1950s, South Africa's exporting community felt the need for a scheme that would insure them against losses resulting from non-receipt of payment for exports transacted on credit terms. Such export credit insurance schemes were then already in operation in Europe for many years and provided European exporters with a competitive advantage.
· As a result of this demand CREDIT GUARANTEE INSURANCE CORPORATION OF AFRICA LTD. was formed in 1956. From the beginning on CREDIT GUARANTEE'S shareholders were the major banks, the IDC and insurance and re-insurance companies in South Africa. Thus CREDIT GUARANTEE has always been owned by the financial services industry in South Africa. Because the sector understood that credit insurance is a comparatively small niche financial service, underwriting banking risks in the form of an insurance policy, requiring specialist knowledge and international connections it was agreed that in place of each bank and insurance company having its own credit insurance department it was more efficient to jointly form one specialist company underwriting credit risks.
· Credit Guarantee represented the first partnership between Government and the private sector. In 1957 Government promulgated the Export Credit and Foreign Re-insurance Act and entered into a re-insurance contract with Credit Guarantee providing the Corporation with political risk re-insurance facilities.
· Typically, credit insurers offer domestic and export credit insurance. Domestic credit insurance affords cover against credit risks resulting from credit sales within the local market. Credit risks that exist due to export sales can be insured through an export credit insurance policy. The export credit risks are that the importer does not pay a legally enforceable debt or protracts payment to the exporter (the commercial or buyer risks). The political or country risks covered by export credit insurance are that the South African exporter does not receive payment for his goods due to actions by the importing country's government, such as withdrawal of an import license, non-availability of foreign exchange, war and other governmental acts, outside the control of the importer or the exporter, which frustrate the export transaction.
· Export credit insurance is divided into short-term and medium/long-term business. Consumer goods are usually sold on short-terms, i.e. on credit terms not exceeding 12 months. Medium (3 to 5 years) or long-term credit (5 to 10 years) is granted when selling capital goods or services, turnkey projects or major components for such projects (e.g. sugar mills, telephone installations, mining equipment, construction projects etc.). In medium/long-term business it is usual that an export credit loan is made available by a financial institution to the importer, which loan is used to pay the South African exporter in cash on delivery and which loan is then repayable by the importer to the financial institution over the agreed credit period (2-10 years). The credit insurer provides both, the exporter and the financial institution with credit cover. A condition is that the goods or services to be exported must be of South African origin.
· The commercial risk in short-term credit insurance, consisting of the risks of insolvency and non-payment by an importer of South African goods and services, is obviously spread over many thousand of individual importing firms and thus these commercial risks are well spread and comply with the general principle of insurance. The political risks, on the other hand, are spread over a comparatively small number of importing countries - 100 or so, seeing that they consist of the non-receipt of payment resulting from the defaults (importation, transfer, war risks) by importing countries. Due the poor spread and the individual size of the political risks they could not be re-insured in the private market. Governments the world over therefore provided the re-insurance or insurance for these risks to their exporting community in order to enable exporters to sell on credit terms internationally. This is the reason why the South African Government has been involved in this business for all these years, i.e. the promotion of South African exports.
· There is presently only a very small and restrictive private sector re-insurance market for medium/long-term credit risks (both commercial and political). Thus, if a country wishes to promote such exports its Government's support either as insurer or re-insurer is required.
· South Africa's export credit insurance scheme, as operated by this partnership of Government and Credit Guarantee has been a successful business for all concerned, i.e. for the exporters, the Government and for Credit Guarantee, as can be seen from the following figures:

 

Export turnover
medium-/long-term
(R'million)

Export turnover
short-term
(R'million)

2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
1979
1978
1977
1976
1975
 

3 999
2 419
1 226
827
433
410
222
364
487
1 014
734
171
133
117
142
195
157
150
186
123
119
79
59
84
104
48

14 476
11 660
8 740
10 748
8 425
6 666
6 086
6 266
9 505
9 518
9 490
7 396
6 047
5 349
4 316
1 932
1 293
1 630
1 495
1 503
1 667
1 272
994
1 011
754
433


2. Changes in the private sector re-insurance market.
During the past 3 to 4 years, the private sector re-insurance market has opened up and begun to accept also short-term political risks in re-insurance. The market is selective. It will not accept all country risks, e.g. cover for exports to Zimbabwe, DRC, Angola etc. is not available from the private re-insurers. The UK Government was the first to demand of its export credit insurer to find political re-insurance for short-term business in the private sector and a few other countries have followed this example. The Governments concerned have remained re-insurers "of last resort", that is where the private market is not prepared to provide the cover, the Government has provided it in the "national interest".

3. Changes in South Africa's Exports.
 

· The bulk of South Africa's exports are sold on short terms. No major changes have taken place in regard to this business over the last few years.


· Exports of capital goods and services (usually sold on terms of 2 to 10 years) have increased quite considerably since 1994 and have become more complex. By far the majority of these exports go to African countries and are done on a "projects" basis. This means that the viability and cash flow from the completed project serves as security for the repayment of the export credit because the importer is usually financially not strong enough to warrant the credit needed.
· The growth in credit insured exports (on short-terms and medium/long-terms) is illustrated by the figures stated in paragraph 1 above.
· Due to increased competition, South African exporters need a faster credit insurance service. This means that the vetting and approval process of applications for export credit insurance must be restructured.
· The international competition is growing constantly which forces down prices and financing/insurance costs.

4. Credit Guarantee's recommendations to Government.
In the light of changing market circumstances, Credit Guarantee made in September 1999 the following written recommendations to Government concerning the future of the scheme:
· Change the present re-insurance agreement with Government into an Agency agreement in terms of which Credit Guarantee would issue policies for medium/long term business no longer in its own name but for and on behalf of the Government. This would provide exporters with insurance directly provided by the Government and not via a re-insurance agreement through Credit Guarantee. The change would allow financial institutions to rank debt covered by such direct insurance as sovereign debt, which would mean a saving in interest cost and would make South African exporters of capital good and services more competitive internationally.
· A new, more effective project evaluation committee should be established, including input by legal, financial and engineering specialists. We also suggested that the IDC should play a major role in this new committee.
As a result of the enhanced evaluation capabilities, greater mandates for the acceptance of projects for insurance purposes could be given to Credit Guarantee and the Re-insurance Committee. This would speed up the decision process and thus enable exporters to react quicker.
· The establishment of a proper claims reserving mechanism should support the re-insurance fund.
· The present remuneration/commission arrangements with Credit Guarantee need careful reviewing.
· Short-term export credit insurance should be re-insured with the private market, Government providing "national interest" re-insurance facilities only where the private market is not willing/able to provide the cover.
These proposals seem to have been accepted in totality by Government with the exception of two points, the changing of the Re-insurance Contract with Credit Guarantee into an Agency Agreement and the question of re-insurance in the "national interest". In place of the Agency Agreement recommendation Government has decided to establish a special parastatal insurance company, the "ECA", which will in future underwrite the exports of Capital Goods/Services on terms in excess of 3 years. The question of re-insurance facilities for short-term exports that are unacceptable to the private re-insurance market has not been addressed at all.

5. Credit Guarantee's present involvement:
· Presently Credit Guarantee receives applications from exporters and banks for credit insurance cover. These applications are evaluated and discussed in detail by Credit Guarantee with the applicants in order to obtain all the information necessary to consider the acceptability of such applications. Credit Guarantee then prepares a report together with a recommendation for the Government Re-insurance Committee. This committee consists of representatives from DTI, the National Treasury, Department of Foreign Affairs and the Reserve Bank. Credit Guarantee itself has no vote at these meetings; we merely present the case and motivate our recommendations. The Re-insurance Committee will then take a decision concerning the application and provided the application falls within its limited mandate, that decision is final. Applications falling outside the Committee's mandate must be referred to the Ministers of Trade & Industry and Finance for approval.
· On approval of an application, Credit Guarantee will issue the policy of insurance, which is drafted specifically to suit the circumstances of the project concerned. Credit Guarantee also attends to the relevant administration, i.e. collect premiums, obtain audit certificates confirming the required South African Content, follow up on overdue payments, etc.
· Should a claim arise, Credit Guarantee investigates the validity of the claim, prepares a claims report for submission to the Re-insurance Committee and on approval, pays the claim (usually after receipt of the relevant amount from the Re-insurance Fund).
· Credit Guarantee also prepares economic/political country reports for the Re-insurance Committee, relevant statistics and progress reports. In case of any questions raised or investigations required by the Re-insurance Committee, Credit Guarantee will attend to these matters.
· Credit Guarantee is the South African member of the Berne Union, the International Credit Insurance Association and the Pan American Surety Association. Through these memberships, Credit Guarantee is in close touch with the international market for credit insurance. Through these channels it receives confidential country and technical information from the World Bank, the IMF, other international financial institutions and credit insurers which information is fed to the Re-insurance Committee to assist in the decision making process.
· In order to deal with all these matters, Credit Guarantee has a department of specialists as well as an economist, all of whom have many years experience.
· Credit Guarantee is being remunerated for its work by way of a commission of 15% on the premiums paid to Government (this compares to normal insurance brokerage of 20%). The commissions earned per year over the past 10 years amounts to:

 

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

On average

Commission
(R'000)

3527

2114

1840

1623

2686

3524

5630

8350

16543

28718

R7455


6. Comments concerning the New Bill:
 

· The South African Government will always have to remain the re-insurer of last resort (as is presently the case) and this assurance will have to be given to the exporters. The exposure of the new ECA on one project alone, the MOZAL project, is presently R 2.1
· It seems that only the Minister of Trade & Industry needs to be consulted with regard to any changes to an insurance contract (presently, both the Minister of Trade & Industry and the Minister of Finance's approval is required). In future the ECA on its own can decide whether a risk is insured or not, i.e. without reference to any organ of Government even though Government is in the end liable for any claims that may result from the transaction.
· Paragraph 2 of Section 2 of the proposed Bill states that "The Minister may enter into an agreement with any person who is a registered insurer ….. with the object of insuring on behalf of the Government". This is clearly not correct and we believe also not the intention. We believe it should read … who is a registered insurer authorizing that insurer to insure on behalf of the Government … .
· Paragraph 2 of Section 2 of the proposed Bill seems to states that "all the contracts entered into …… being subject to risk of monetary loss or monetary detriment…" should be insured with the ECA. The meaning of this paragraph is not clear. If it is the intention that an exporter must insure all his medium/long-term business with the ECA or that an exporter may not insure with another insurer a part or the whole of a transaction then we believe that the clause is unconstitutional.
· We query the legality of paragraph 11 (2). Exporters entered into agreements of insurance on certain terms and conditions and we do not believe these terms can be changed one-sidedly.
· The Bill does not provide for the re-insurance of short-term exports that cannot be re-insured in the private market. Without such a provision short-term exports to such markets as Zimbabwe, Zambia, Ghana, Ivory Coast etc. are likely to stop as from 1st July 2001 onwards.

7. Comments on the "Memorandum on the Objects of the Export Credit and Foreign Investments Re-insurance Amendment Bill, 2001:
· "the dispensation involving CGIC is monopolistic". While this is true, CGIC does, through its shareholders, represent to a large extent the South African financial services sector. The new ECA will be a monopoly run by the Government.
· "it (the dispensation) also contains inherent risks for Government which need to be managed carefully". The suggested new dispensation does not change this.
· "the fact is that the CGIC is not taking any risk on projects itself and has become little more than a commission agent". Credit Guarantee's obligations in terms of the existing Re-insurance arrangements have not changed since the inception of the agreement in 1957.
· "Government accepts that it should underwrite these risks and that they should be carefully assessed and managed in line with best international practice". The earlier comment that CGIC does not participate in these risks is correct and the reasons have been spelt out, i.e. credit risks of medium/long-term duration in difficult markets on a project basis are not capable of being placed in the private insurance/re-insurance markets. Government is and always has accepted this. That these risks need careful assessment is without any doubt and that is what has been done in the past although, as already suggested by Credit Guarantee some 18 months ago, there is a need to improve the process. Whether the new ECA will be able do deal with this in a more professional manner than done in the past and as suggested by Credit Guarantee will be shown by future results. All the major international credit insurance schemes have accumulated vast losses over the years. South Africa's export credit insurance scheme by contrast is approximately R 700 million in credit and has never needed to request Parliament or the Minister of Finance for support in respect of its standard operations.
· Whether the management and underwriting of medium/long-term credit risks by a parastatal insurance company is "best international practice" is questionable. The largest credit insurance schemes in Europe (Coface, Hermes, NCM) are private sector companies writing this business on behalf of the French, German and Dutch governments. The largest export credit insurer in the world, the Japanese scheme is a hybrid scheme at present, moving from Government to private sector.
· Government says it will diversify the risk portfolio through strategic international alliances. While we agree that this is an important goal, particularly where South Africa's risks will be concentrated in Africa and other difficult markets, the establishment of a new institution in form of an ECA is not needed for this purpose.
· Replacing or, better, supporting the Re-insurance Fund with a Reserve Fund should have been done a long time ago and is not dependent on the establishment of an ECA.
· The banks and exporters have not much choice but to support the newly suggested scheme because they need credit insurance and smooth relations with any new ECA.
· It is stated that the World Bank offered a "memorandum of understanding" once the ECA is in place. It is not clear what this means. Credit Guarantee and South Africa's credit insurance scheme has always been able to work together with all the international financial institutions, including the World Bank where this seemed appropriate.
· Currently some R 40 million is being paid to CGIC annually as commission. It is estimated that the ECA will register a 50% saving on this amount. As will be seen from the commission figures quoted earlier, CGIC has not received R 40 million per year and it in fact asked Government some 18 months ago for the re-negotiation of the commission system. We agree that it does not cost R 40 million per annum to run the scheme as presently constituted, however our income was entirely geared to the flow of premiums. As a result we have provided the service at a loss for some years and at a profit for others. Particularly the last few years have produced good commission incomes for us and that was precisely the reason why we suggested to Government that the method of CGIC's remuneration required changing. Whether the new ECA will achieve real savings is difficult to say at this stage.

8. Other issues:
· Will the new ECA be fully operative as from 1st July onwards? There are some very large export projects in the pipeline, e.g. MOZAL II. To bring these to fruition takes a lot of negotiation time, international travel and expert input. It would be a great pity if some of this business would be lost to South Africa.
· Credit Guarantee has for a number of years managed for Government a Bank Guarantee Scheme, which provided, with 100% Government re-insurance, payment guarantees to commercial banks on the strength of which these banks made funds available to small business for the execution of export orders won by them. CGIC ran this scheme at a considerable loss to itself but, as it was part of the whole service arrangement with Government, we accepted this. Unfortunately we have had to withdraw from this scheme, as we cannot continue under the changed circumstances to provide this facility at a loss to us.
· Establishing a new parastatal does not seem in line with Government's stated policy of privatization.

May 2001.


 

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