Role of Export Credit Agencies in Infrastructure Finance
In this article we continue with our discussion on credit enhancement and risk mitigation instruments to facilitate infrastructure investments. We take a particular look at the role of Export Credit Agencies, commonly known as ECAs. These are predominantly public agencies and entities that provide government-backed loans, guarantees and insurance to facilitate exports from their home countries. ECAs provide cover either by means of insurance to the exporters or bankers or by means of a direct guarantee to the bank or other investors covering a loan to an overseas borrower to finance the supply of goods and services.
The guarantees protect the lender in the event of any default in payment by the buyer or the borrower under a loan agreement. Such insurance cover or guarantees could be a combination of comprehensive cover, covering both commercial and political risks, or only political risk cover. Commercial risks are typically covered up to 85%, whilst political risk cover can range from 90% to 100% cover depending on the mandate given to the particular ECA by their Government.
By securing ECA cover, a lender effectively credit enhances the transaction and the ECA substitutes the borrower as the counterparty. Foreign direct investments are then promoted with infrastructure built and jobs created in both the host country where the projects are based and the ECA country that supplies the raw material used in the project and, in most cases, the contractors who undertake the projects. We believe that ECAs are a major and powerful tool in fostering economic development in Africa if used more extensively. There does not appear to be sufficient evidence of extensive use of ECAs in Africa although a number of large deals involving ECAs have been announced in the past, with China leading the pack through China Exim Bank and Sinosure.Others are US Exim Bank, the Canadian ECA that recently opened an office in South Africa, and ECAs from many countries in Europe. It is estimated that the ECAs combined provide more than $450 billion in cover or direct financing annually around the World, surpassing even institutions such as the World Bank Group. Africa must aim to have a bigger slice of this to accelerate its programmes of industrialisation and infrastructure development.
ECAs aim to be flexible, allowing longer repayment terms of up to 15 years, and, depending on the nature of the transaction, allowing repayments to be made in unequal instalments and for interest payments and principal repayments to be made less frequently than semi-annually. One source noted that asa result of developing country indebtedness and substantial defaults on sovereign loans, the financial world, rather than depending on sovereign guarantees, now increasingly look at other forms of financing. ECAs provide that alternative that effectively credit enhances transactions, especially that most ECAs are from countries with investment grade rating, being rated BBB or better, compared to many countries in Africa.
We believe that ECAs are potentially one of the best entities to provide cover for the financing of limited recourse projects for Africa’s development.Project sponsors and Governments need to keep this at the back of their minds when structuring projects and ensure that the project structures meet the requirements of ECAs. Most ECAs have been operating for many years and have built up considerable experience of supporting a variety of project finance transactions. The ECAs are also highly seasoned participants in emerging markets, and they are less sensitive to political risk than private lenders. The ECAs have long-established relationships with key players, especially the host governments and state-owned companies.
With their flexibility, ECAs are able to provide a variety of cover options in respect of political and commercial risks pre-and post-construction. They tend to bring considerable value through the independent approach that they take in assessing deals, often raising issues that are arguably too sensitive for the sponsors to pursue. Foreign direct investors would also recognise the potential for the diplomatic approachthat ECAs may take at Government to Government level to resolve any particularly sensitive issues, most of which are political. Most ECAs are also able to support financing in local currencies best suited to the project revenue steam. This is certainly desirable for infrastructure projects not earning US-dollar revenue.
ECAs around the World cooperate extensively in transactions, building on the strengths of each other. Most ECAs cooperate through cooperation agreements that they have signed with each other.Apart from other ECAs, most ECAs also partner with other multilateral organisations such as the African Development Bank, the Islamic Development Bank and the Multilateral Investment Guarantee Agency of the World Bank Group who are also increasingly providing similar cover for member countries.
For the ECAs to obtain the appropriate approvals from their credit committees or boards, a full due diligence review and appraisal of the project is necessary allowing consultants, independent of the sponsors, to confirm the validity of the sponsors’ assumptions.ECAs require a lot of information to undertake their due diligence.This is typically information required by any investor, which includes, but not limited to, the following: (1) a description of the project and its location; (2) a description of the sponsors and shareholders; (3) details of the technical and financial feasibility showing overall cost of the project and a full breakdown of such costs; (4) the proposed financing structure with breakdown of capital costs between the various lenders, ECAs, equity holders and other financiers; (5) a full list of agreements envisaged, such as offtake agreements, concessions,implementation agreements and their status; (6) a summary of the support expected from the ECAs; (7) an understanding of the risk of government interference based on the commitments they are prepared to provide; (8) an understanding of the security of revenue stream; (9) an understanding of the legal risks and the range of laws governing the project; (10) an understanding of the extent of host government involvement; and (11) an understanding of how environmental, social and human rights issues are being dealt with.
National Standard Finance’s funding model in Africa is geared towards the use of ECAs in credit enhancing transactions to promote foreign direct investments. This is necessary to support a Direct Pay Letter of Credit from major international banks upon which National Standard’s funding model is based.
Michael Tichareva is Principal & Managing Directorof Africa operations at National Standard Finance, LLC. Mr. Tichareva can be reached at MTichareva@NatStandard.com.
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