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 as a 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
approach that 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.
(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. (Guardian)
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