Export Credit Insurance Corporation: briefing on its Operations and 2006 Financial Position

TRADE AND INDUSTRY PORTFOLIO COMMITTEE
25 October 2006
EXPORT CREDIT INSURANCE CORPORATION: BRIEFING ON ITS OPERATIONS AND 2006 FINANCIAL POSITION

Chairperson: Mr B Martins (ANC)

Documents handed out:
Export Credit Insurance Corporation PowerPoint Presentation Part1 & Part2

SUMMARY
The Export Credit Insurance Corporation of South Africa, a state owned enterprise forming one of the agencies of the Department of Trade and Industry, briefed the Committee on its background, functions, the type of work undertaken, its spread and focus, and a brief summary of its performance. It was the official export credit agency of South Africa, and enhanced international trade and investment through risk assessment, risk management and pricing. It was a member of the World Trade Organisation (WTO). It undertook business in the medium and long term only, operating in the export credit business, and where private sector insurance was not available. It aimed to be at the leading edge of the chosen market. It focused on project finance underwriting, customer needs, and prudent performance and risk management.

The presentation detailed the three main products of investment insurance, credit insurance and foreign exchange insurance. The achievements under each heading were listed and explained. An organogram of the structure was tabled. The gender ratio was 53% female and 46% male, and 20% white and 80% black.  ECIC had enjoyed moderate profits. Investment income was steady. Because its business was risk based, it had to ensure that investments were safe. The net profit after tax had been R157.2 million. It could not yet report to the committee its exact impact on economy, but independent economists were working on a model for assessment. A performance bond scheme had been developed with the Industrial Development Corporation, so that small, medium and micro enterprises could procure working capital. The future activities would include development of a strong worldwide pipeline of export credit and investment insurance transactions, particularly in the mining infrastructure sector, where South Africa had a competitive edge.

Questions asked by members covered its business profile in Africa, the use of external fund managers, and the composition and remuneration of the Board. There was a lengthy discussion on whether it was correct for ECIC to insure certain political risks. Further questions were asked on calculation of risk and premiums, the developmental agenda, how clients were assessed, BEE compliance of insured clients, clarity on projects, and the relationship with the World Trade Organisation. The interaction with the Department and with other departmental agencies was clarified. It was noted that this organisation would return to the Committee at a later stage for further interaction.

MINUTES
The Chairperson welcomed the Chairman and General Manager of Export Credit Insurance Corporation (ECIC) to the meeting and noted with appreciation that the newly appointed Director General of the Department of Trade and Industry (dti), Mr Tshediso Matona, was also present. He stated that ECIC was an important vehicle by which dti could support economic development, locally and in the African continent.

Mr Tladi Ditshego, Chairperson of ECIC, stated that in addition to his post as Chairman, he was a member of a group involved in investment and the construction industry. He had previously served on the audit committee for ECIC.

Mr Emile Mathee, General Operations Manager, ECIC, stated that ECIC was the official export credit agency of South Africa. Export Credit Agencies (ECAs) worldwide held different functions varying from banking, through corporate lending to government departments. In South Africa it was a public company providing insurance on behalf of government. Traditionally the role was to facilitate and stimulate exports through insurance or financing trade. However, the focus on exports instead of on risk had created large deficits. Its role had been rethought and it currently existed to enhance international trade and investment through risk assessment, risk management and pricing. It was a member of the World Trade Organisation (WTO) and was therefore required to break even on its finances.

ECAs generally undertook business in the short, medium and long term. Short term related to commodities payable within one year, medium term to two to five year repayments and long term any transaction payable over more than five years, including buildings, mining operations and capital goods. Short-term private sector insurance was readily available, and medium term usually available. For the long term, however, public insurers had to fill the market gap. ECIC was established in 2001 and operated exclusively in the medium and long-term business. It took over the assets and liabilities of the Credit Guarantee Insurance Company, which had provided first layer insurance, with dti picking up the reinsurance, in the domestic credit insurance market. ECIC was now operating in the export credit business, and where private sector insurance was not available.

ECIC aimed to be at the leading edge of the chosen market. It focused on project finance underwriting, customer needs, and prudent performance and risk management. Its products were investment insurance, credit insurance and foreign exchange insurance. Investment insurance was concerned with political risks including nationalisation, expropriation, compensation or wherever the actions of government interfered with business to an extent where it could no longer operate profitably. Currency transfer risks could also be covered. Credit insurance was provided to banks putting up financing for projects, either in rands or US dollars. The premiums would be paid in the same currency as the cover provided. Foreign exchange insurance would provide contractors with a guaranteed rate of exchange. Cover was provided in terms of the South African Reserve Bank Act.

ECIC’s four main objects were focusing on customers, enhancing performance, engaging in strategic alliances and fostering risk orientation. The achievements under each heading were listed and explained. ECIC had developed a custom-made underwriting manual and methodologies to improve service and performance. It cooperated internationally, and in the last year had signed contracts with Japan, Sweden and Iran. Its core interests would, however, remain in Africa. It collaborated with dti, the banks, National Treasury and other bodies. An organogram of the structure was tabled and it was noted that the current gender ratio was 53% female and 46% male and 20% white and 80% black over the whole organisation.

Risk orientation and mitigation had become an increasingly important area of business. A risk register had been set up and was revisited each month, with quarterly reports being made to the audit committee. Reinsurance business was declining, and currently stood at R3.5 billion. Insurance was growing, being currently at R5.6 billion. The concentration of risk was important. Reinsurance could not be obtained and consequently the entire book was managed by ECIC. It strove for good spread of risk across different projects and countries. The Mozal project had had a huge impact but its exposure was declining since it was now in the payment phase. This had been voted as the best project in the world and the exposure was safe. Other work was taking place in Mozambique, Turkey, Nigeria and Zambia.

Mr Mathee tabled a summary of the financial results for the last period. ECIC had made a loss in its first two years of operation, breaking even in year 3. This year it enjoyed moderate profits. Investment income was steady. Because its business was risk based, it had to ensure that investments were safe. The net profit after tax had been R157.2 million. The challenge remained always the management of jobs. Although ECIC enhanced the finance that created jobs, it was difficult to assess its own direct economic impact. It had to be measured both in South Africa and the host country and often the impact was more pronounced in host countries that were less well developed. The next reports would show more concrete figures and independent economists were presently verifying the model used to assess the market impact. The nature of the business meant that ECIC mainly supported capital goods and its clients were therefore experienced South African contractors. Some were small or medium enterprises, but increasingly more of the smaller subcontractors should fall into this category. A performance bond scheme had been developed with the Industrial Development Corporation, so that small, medium and micro enterprises (SMMEs) could procure working capital. The future activities would include development of a strong worldwide pipeline of export credit and investment insurance transactions, particularly in the mining infrastructure sector, where South Africa had a competitive edge.

Discussion
Prof B Turok (ANC) stated that the Committee was interested in seeing real performance indicators, and would like to receive information on the functioning of the global economy, including global risk, contingent risks and any documents with information from consultants. He stated that he would be attending a conference in Dar Es Salaam the following week, and had no doubt that there would be accusations that South Africa was operating unfairly, with State backing, subsidies or insurance. He would be interested to receive a preliminary business profile of the business activities in Africa.

Mr Mathee stated that ECIC could not give much information as ECIC’s business tended to be selective and many South African businesses would never engage with it. The World Bank agency was likely to have more information, as this agency did not have its cover linked to South African contexts. Many otherwise worthy businesses who approached ECIC could not fulfil its conditions that there must be a sufficiently strong South African link. 

Prof Turok asked what the current model was for impact assessment, and what it would ideally be in future.

Mr Mathee stated that the models were not perfect and the projects were very diverse so ECIC had to be careful in attempting to prescribe an ideal. There was much work to be done, and much had still to be done on developing a model to substantiate the effect of ECIC in the local and foreign economies. The results of the investigations would be shared in due course.

Prof Turok referred to the fact that the Public Investment Commission (PIC) had at one stage used private and external fund managers. He was concerned that ECIC was also doing so as this had been found to be unprofitable, with the added risks of insider trading and high costs. A state owned enterprise should be using a viable and correct model.

Mr Mathee stated that he understood the concerns. ECIC had seven fund managers but was looking to increase this number. ECIC included a comprehensive report on treasury operations and had had some concerns on the placement of funds and the number of fund managers, which were now being attended to. The number of external managers would decrease and the scope of investment would in future be more structured.

Prof Turok was concerned with the fact that ECIC was insuring against nationalisation and government interference in African countries as he had political reservations about this stance and felt that to do business in this way was rather insensitive.

Mr L Labuschagne (DA) differed from Prof Turok on this point, believing that this type of insurance was simply sound business practice in the environment.

Mr S Njikelana (ANC) believed that it was possible to distinguish between the political implications of nationalisation and the losses caused by such nationalisation.

Mr J Maake (ANC) noted that compensation was often given in cases of nationalisation.

Mr Mathee agreed that this could be so, but in this case the full insurance cover would not be paid out; only the extent to which loss could be proved.

Mr Mathee commented that these were interesting points. However, this type of insurance was not limited to South Africa, or indeed Africa, but was seen worldwide. Sweden’s arms deals were backed up by their national credit agency, who had safeguarded their lenders against the risk of nationalisation by the South African government. All countries, high and low risk, accepted that this was the norm as lenders would not give the finance without ensuring safeguards were in place. He pointed out that the financiers would be around for years after the project was completed, and would obviously have to obtain back-to-back refinancing arrangements. This refinancing would simply not be given if the insurance was not in place. The policies were complex and intricate and included clauses to the effect that cover would be repudiated if the insured provoked action from governments. Nationalisation was not the only threat, but the insurance also covered actions that could undermine the profitability of projects, and discriminatory acts. If, for instance, a government decided to increase taxation on mining companies across the board, that would not be covered, but if a government targeted one particular mining company or one project for increased taxation, that would be covered.

Mr Ditshego mentioned some examples of political risk. Murray and Roberts had undertaken a project in Nigeria and were never paid. He himself had the experience of having organised a conference in 2001 at a Hilton Hotel in Lagos, which, having received a substantial deposit, simply failed to refund the difference over a period of six months.

Mr Mathee stated that “nationalisation” could mean different things to different people. It was impossible for a policy simply to cover “political risk”. It must be broken up into various defined categories. The risk could include the risk that the legal system would not provide an adequate or unbiased right of recourse. ECIC concentrated rather on the debt absorption capacity.

Mr Ditshego added that political risk could also include expropriation, economic freedom, the level of involvement of the government, property rights, currency restrictions and transferability. Commercial risks included the transaction type, income generation, sovereignty issues and exposure to the government. The debate was always whether the risk was political or economic, and this very question had been raised in Argentina when the country effectively ran out of money.

Mr Tshediso Matona, Director General, dti, was surprised about Prof Turok’s assertion that insuring against nationalisation showed some insensitivity. ECIC merely participated in an international market for risk and this type of insurance was the norm. The fact that ECIC offered this type of insurance was not in any way suggestive of a value judgment. It was merely a response to the realities of the situation. If ECIC did not provide this insurance it would effectively be cut out of the international trade investment market. He stressed that other countries investing in South Africa had similar insurance and South Africa had happily negotiated such agreements.

Mr J Maake (ANC) asked how ECIC would calculate political risk and how its premiums would be calculated.
He gave as examples the type of risks in Darfur or Ogoni region. If premiums were high because of the high rate of trouble, there was also the danger that companies would “instigate” trouble themselves, perhaps by paying vigilantes or bandits, in order to defraud insurers.

Mr Mathee stated that the political risk premiums had to some extent been standardised by the ECAs and the “Knaben Package” was followed. Under this, countries were classified from 1 to 7 and there were minimum benchmarks prescribed for political risk premiums. Each member had agreed not to undercut those minimums, which were based upon years of experience of debt. The whole of Africa had been classified as risk value 7, except for South Africa and Botswana. This was despite the fact that ECIC felt that Mozambique should be assessed at 5 and not 7. ECIC would not cover projects in Darfur or some other regions, but there were always some people who found it possible to operate in politically sensitive areas. ECIC would try to be certain that the project would work. On the possibility of insurance fraud, he stated that there was a waiting period of one year on political cause of loss claims, and in that period the claims were thoroughly investigated and similar patterns established to determine whether the loss was truly political, or had been engineered.

The Chairperson added that even in short term insurance, the premium for the same object would differ according to where it was to be kept or used.

Prof Turok raised a sensitive issue, stating categorically that he did not in any way wish this to be seen as a personal criticism or as reflecting upon the abilities of the Chairman of ECIC. He felt that the board members of ECIC should not be engaged in business in the private sector. There was always the danger of cronyism, inside knowledge and conflicts of interest. Both the Auditor General and the Public Service Commission had expressed similar concerns on these principles in the past.

Mr Ditshego (Chairman, ECIC) replied that he could appreciate that there were sensitivities. He had only recently joined the private sector, having previously managed the Presidential Review on the Transformation of Public Enterprises, and having also managed President Mandela’s office and been involved in the Development Bank. He personally was absolutely committed to the development of South Africa. His involvement in the private sector would not conflict with his duties with ECIC. In the event that any projects posed a potential conflict, he would naturally recuse himself and indeed had already done so on some occasions. The company he was involved in owned 25% of Murray and Roberts (M&R) and therefore whenever M&R were on the agenda, he did recuse himself. The Board of ECIC consisted of representatives from the private sector, dti, National Treasury and the Reserve Bank. The private sector appointments had been made by the Minister, and Mr Ditshego was satisfied that none would compromise the government or themselves.

Mr Matona stated that dti was satisfied that the process for appointment of board members had been vigorous and open. Intelligence Services and Cabinet were involved in the process and there was a thorough investigation of all members for suitability, competency, skills and potential contribution. The Board was expected to work to the highest standards of corporate governance and dti would continually check on this. Of course, nobody could guarantee against human fallibility. As a matter of principle people should not be denied the opportunity to participate in Boards because of the work they were undertaking elsewhere.

Mr L Labuschagne asked for clarity whether the SMMEs being promoted were South African or based in the foreign countries.

Mr Mathee replied that SMMEs being assisted by project investment could be based either in South Africa or abroad, but the financing assistance was on the basis of specific projects, and there had to be a South African connection.

Mr S Rasmeni (ANC) asked for an indication of the developmental agenda and programmes.

Mr Mathee stated that ECIC was currently in quite a healthy position and had developed a number of scarce skills. As testimony to this, banks had poached some of the senior managers, but ECIC was pleased to have added other skills and to have good succession planning in place.

Mr Mathee said that it was difficult for ECIC to prescribe the developmental agenda as it was not a lender. External operators would approach ECIC which would try to measure and assess the impact of the operations. ECIC would try to measure and assess impact. The value and socio-economic impact were always considered. World Bank standards were followed in assessing environmental impact.

Mr Ditshego added that ECIC acted as a wholesaler and would not give direct funding. MTN would, for instance, do a project in Cameroon. Through its support of Cameroon it could be said that ECIC was helping to promote development in Cameroon. It was a question of causation.

Mr Rasmeni asked for clarity on avoidance of risk in the programmes.

Mr Mathee stated that when ECIC was first established, everything was counted as a risk. Once the structures were set up and the strategies planned, Deloitte had been asked to undertake a company-wide risk survey with a view to identifying and mitigating the risks. Management reviewed the risk register quarterly and new risks were identified. The list would set out where the risks were and where they should be managed. For instance, the Mozal project risks were concentrated heavily, and ways must be found to spread it and include risk mitigators. All projects were insured with various insurers.

Mr Ditshego added that KPMG auditors had been consulted and had not identified any internal weaknesses in the internal control environment.

Mr Rasmeni asked how ECIC would assess clients before insuring them. He asked if the criteria included a check on their compliance with broad based black economic empowerment principles (BBBEE).

Mr Mathee replied that the clients were very diverse and the ECAs were often subject to the policies of government and the countries where the operations were based. ECIC had only bank clients because the contractors who undertook the projects would leave, and the only ones left behind were the lenders. The banks would have to comply with certain “scorecards”. Developmental impact was certainly one of the areas measured. ECIC followed the objectives of dti and would submit business plans to the Minister and dti. He stated that insofar as the premiums were concerned, the political risk premium had to some extent been standardised according to the “Knaben package”. Countries were classified for risk from 1 to 7, and there were minimum benchmarks for the premiums.

Mr Rasmeni also stated that there were now many companies taking advantage of the opportunities in Africa and many would not check whether their subcontractors or associates were compliant with current requirements. He enquired whether ECIC would do anything to find out from an intermediary about BEE compliance issues.

Mr Matona expanded on the remarks made by Mr Mathee, stating that there could not be a single model. As stated, there was a broad range of clients. Constitutionally, dti supported all entities in South Africa, whether black or white owned. Certainly it would, through a system of initiatives, encourage companies to undertake transformation in accordance with the BEE framework and codes. However, it must be accepted that in respect of a supplier to dti directly, or a company participating in a tender, dti would have more direct leverage to influence compliance than in the ECIC situation, where it was insuring rather than driving operations.  There was no policy decision that dti would not do business with an entity that was not BEE compliant.

Mr Njikelana commented that there was a danger that some companies might disinvest rather than become BEE compliant.

Mr Mathee stated that ECIC would ask the insured about their policies, and these were put on record for each project. Some companies would in addition be required to satisfy ECIC that they, in addition, complied with the charters (such as the Financial Charter, or the Mining Charter) applicable to their area of business. In regard to the danger of disinvestment, Mr Mathee stated that ECIC had very few clients

Mr Njikelana asked for indications of which projects, apart from Mozal, were currently being handled, and which were being planned. He also asked where these were based.

Mr Ditshego stated that ECIC supported companies such as MTN (in Tanzania and the rest of Africa), Vodacom, construction companies, including building in Ghana for the 2008 Cup of Nations, the Tshiri Shopping Centre in Malawi, and a 49 km toll road in Lagos, Nigeria. The latter was the first public private partnership concession in Nigeria and involved the African Investment Infrastructure Fund (AIIF). ECIC tended to be quite reactive as developers would ask ECIC when they needed export credit or investment insurance on projects. In Argentina there had been very little cover because of the fierce competition, so that nobody thought there was a place for credit risk insurance. Already in Africa the high prices being offered for mining meant that some companies were lulled into ignoring the risks.

In so far as specific projects were concerned, Mr Mathee stated that the Mozal project had been concerned with non-ferrous metal, and the Sasol project involved the gas pipeline. A power project was underway in Turkey in which South Africa had supplied the coal-fired boilers for the power plant. MTN were supported in Nigeria. Other divergent businesses operated in different areas. ECIC was always very careful where projects involved oil or gas to ensure that the community had been consulted and would receive spin offs. A toll road was being built in Lagos, and here again there was focus on whether the street vendors, who could potentially be affected, were consulted, and on how the tariffs would be determined. 

Mr Njikelana asked for an indication of the relationship between the World Trade Organisation (WTO) and ECIC.

Mr Mathee stated that he was happy that ECIC was at the forefront and was making a profit. ECIC would only be subject to WTO scrutiny if it made sustained losses over a lengthy period. The rules were not that clear, but the subsidy was determined by whether the entity was breaking even or making losses “over a sustained period”. In ECA terms, that would probably mean fifteen years or more, so that a company not making a profit over one or two years would have time to recover the situation.

Prof E Chang(IFP) asked for clarity on business with the South Africa Customs Union and what policies might apply.

Mr Mathee replied that the South African Customs Union would qualify, but as the cover given by ECIC was in support of investment in capital goods, there would generally only be a few projects per country. There was no cover for general exports, but the countries within the Union would be classified as foreign destinations.

Mr Rasmeni raised the question of the staffing profiles. He was pleased to see the gender figures but noted that most females were employed at administrative levels, rather than executive management.

Mr Mathee stated that the gender and racial profile were being worked on all the time. He stated that in fact there were 66% females in operational management and on the operational committee.

Mr Matona stated that this point had been noted and dti would look at it again..

Mr Labuschagne asked for clarification on the remuneration of directors of the Board.

Mr Mathee confirmed that the Directors were paid for the meetings attended, and the preparation time for those meetings.

Mr Njikelana stated that ECIC had a specific mandate from dti, but was also involved in matters that were related, such as the global economy, understanding of trade policies and so forth. He understood that Trade and industry South Africa (TISA) was to provide information on the global economy. He asked how the two co-operated and interacted and what was taken into account when ECIC assessed it policies.

Mr Matona confirmed that there was to some extent an overlap and dti would look at ECIC as against TISA,  which promoted investment out of South Africa, and try to correlate and fill in the gaps.

Mr Mathee added, in relation to the ECIC and dti relationship, that there were two decision-making bodies who both had experience in credit investment insurance cover. Once ECIC had adjudicated on a matter, via its technical committee consisting of operational managers, the matter would be referred to the credit insurance committee, consisting of one executive member of the company, the CEO of the Board, representatives of National Treasury, dti, the Reserve Bank and the Department of Foreign Affairs. In making a decision they would look at the political, economic, financial and policy aspects of the country. Dti was represented on the ECIC Board, which saw details of every project and policy, claim and salvage.

Mr Njikelana noted that reference had been made to corporate agreements with Japan, Sweden and Iran. He asked why only these three countries had been chosen.

Mr Mathee clarified that these were the countries with whom ECIC had been working in the past year. ECIC would try to ensure that agreements were signed only in situations where there were some proven results, and would work with the Multi-national Investment Guarantee Agency of the World Bank (MIGA). He clarified that there were other cooperation agreements with Canada and Sweden, emanating from previous years, as well as the projects he had already outlined. 

Mr Njikelana asked why there was a decline in reinsurance and a rise in insurance.

Mr Mathee stated that ECIC had originally “inherited” the reinsurance business, and the nature of that business was that it would fall off over time as the risks decreased. The insured companies would be paying over ten to fifteen years so that there was a defined life cycle for projects. The new business was concentrated in insurance only.

Mr Njikelana asked whether ECIC had done a comparison of political against non-political risk cover.

Mr Mathee stated that political risk was significant. The classification of risk was, however, a grey area. The cause of loss was often the determiner; and the types could range from political aspects to insolvency to protracted default. The policy would set out the types of risk covered.

The Chairperson thanked the presenters and indicated that, as there were still a number of areas that needed to be discussed, ECIC would be asked to return to the Committee at a later stage.

The meeting adjourned.