The Role of State-Backed Export Credit in Export

The Role of State-Backed Export Credit in Export Promotion World Bank’s Seminar on POLICIES TO PROMOTE EXPORT GROWTH AND DIVERSIFICATION Diana Smallridge, President International Financial Consulting Ltd. May 10 th, 2006 tel: 1. 613. 742. 7829 100 Queen Street, Suite 1350. Ottawa. Ontario. K 1 P 1 J 9. Canada fax: 1. 613. 742. 7099 www. i-financialconsulting. com info@i-financialconsulting. com

2 What is Export Credit?

Export Credit as Public Policy Instrument q Export credit is a critical instrument to secure foreign sales and facilitate outward FDI q Almost all OECD and most developing countries have an export credit agency (ECA), or an export credit facility q The existence of such facilities arises out of the inherent risk present in international transactions, whether trade or investment q International trade involves additional and distinct risks as compared to domestic commerce 3

4 What is Export Credit? q q q Export credit plays a role of central importance in international trade. Risks of various sorts are inevitably associated with international trade transactions, arising regardless of whether or not goods are sold on credit. As soon as an exporter or seller begins to produce goods or services to sell to someone else, there is the risk that: n n they may be unable to ship the goods or deliver the services or, even if they can do so, they may not be paid.

ECAs play an important role in trade and investment flows The basic role of an ECA is to support and encourage exports and outward investment by providing financial support, through insuring or guaranteeing international trade and investment transactions and, in some cases, providing loans or finance directly. 5

ECAs are significant providers of capital to developing markets q Between 1982 and 2001, members of the International Credit and investment Insurance Association (the Berne Union) supported exports of US$7. 3 Trillion and FDI of US$139 Billion. q In 2004, members insured or financed US$775 Billion. 6

7 Timeline of ECA Development 1910 s UK Germany 1960 s Hong Kong 1920 s Netherlands Norway 1970 s Australia Denmark Korea Taiwan Portugal Spain Sri Lanka 1930 s US Mexico Switzerland Sweden 1980 s Egypt Jamaica Turkey China Indonesia 1940 s Canada Austria France Italy 1990 s Nigeria Colombia Romania Thailand Philippines Malaysia Hungary Bosnia Slovenia Slovakia Bulgaria Czech Republic Poland Singapore Brazil 1950 s Japan Finland Belgium India Israel South Africa 2000 s New Zealand Pakistan Africa Yugoslavia Macedonia Vietnam Bangladesh

There is no such thing as a typical ECA While the mandates and roles of all ECAs are broadly similar, there is no such thing as a “typical” ECA. q ECA business models, status, objectives, institutional arrangements, and government involvement vary widely from country to country. q These differences reflect unique national circumstances and histories. 8

Nor is there a single, perfect model for an ECA q Variety of forms, structures, products, delivery mechanisms exist q Each must be tailored to individual national or regional circumstances n n n Some ECAs underwrite business on their own account as well as the Government’s. Some insure only Short-term business, some only Medium/Long-term business, and some do both. Some only insure or issue guarantees, some only lend, and some do both. Some are called insurers and some Export-Import banks. Some only insure exports, while another institution insures investments. 9

10 Main ECA Business Model Description Countries Private Company acting as an Agent • Government has an exclusive arrangement with a private company that issues policies as agent for the Government. France Netherlands Germany Government department/ facility • Separate department of the government operating under the authority of a government minister, secretary etc. UK Switzerland State-owned Agency • Autonomous institution owned by the government (or governments if regional) Canada, US Turkey, Japan Virtual ECA • Government is only involved in the risk taking and decision-making. No underwriting expertise or “bricks and mortar” institution exists New Zealand Government Provider of Reinsurance • Government will not underwrite ST business directly, but will provide reinsurance to insurers UK Australia*

ECA facilities vary according to national and regional circumstances 11 Facilities offered may vary to reflect the difference in the market gaps Developing Country • Import finance • Domestic investment finance • Refinancing • Working capital finance (tier 2) • Working capital guarantees • Finance to overseas buyers • Credit insurance Developed Country • Working capital guarantees • Refinancing • Outward investment finance • Finance to overseas buyers • Credit insurance

12 Challenges of ECAs Most governments see the role of ECAs as filling market gaps and encouraging privatesector participation in export credit. q Gov’ts recognize the need to regularly evolve and adapt their export credit systems. q Gov’ts make a conscious effort to strike the right balance between promoting exports and promoting private-sector participation. Market gaps may arise for two main reasons: (i) privatesector reluctance/inability to accept certain risks (e. g. , host country political/market risks, long-term fixed-rate lending, etc. ); and/or (ii) private-sector reaction to market cycles or economic crises.

13 Need to identify market gaps Market gaps must be under constant review to ensure that the ECA is not creating disincentives to private sector participation. q Need for regular monitoring of systems, products and market changes q Responsibility to adapt to market changes

14 Need to identify market gaps In defining market gaps, three points must be taken into consideration: q It is dangerous to assume that a gap, which may have existed for many years, still exists; or q A gap may exist because of the actions (or unintentional consequences of actions) of the development bank itself which crowd out the private sources; or q Just because a gap exists, it is not necessarily a good reason for the ECA to fill it.

Export Credit Products take four main forms q short term credit insurance q medium and long-term credit insurance and finance q investment insurance q Working capital guarantees 15

16 Short-Term Credit Insurance q Term: up to 2 years, but most under 180 days q Coverage: Pre- and post-shipment risks; political and commercial risks q Also other products, eg L/Cs, forfaiting, factoring q Trends: dominance of three international private insurance groups

Medium- and Long-Term Credit Insurance and Finance q Term: over 2 years q Coverage: Political and commercial risks q Other products, eg bank lending, capital markets, forfaiting q Trends: decline in traditional sovereign risk business and rise of project finance structures q Subject to the OECD Arrangement 17

18 Investment Insurance q Traditional coverage: Political risks (expropriation, convertibility/transfer, war/civil unrest) q Trends: applied more to loans than equity leading to arbitraging between medium/longterm credit insurance and investment insurance q Some interest in expanding beyond three traditional political risks q Offered by private sector insurers and MIGA

19 Working Capital q Strong demand, especially from SMEs q Not a core area for ECA support q However, export credit insurance policy can be used as security for bank working capital loan

The relevance of International Guidelines on export credit q Berne Union: n q goods sold mainly on short terms OECD Consensus Arrangement: n n q 20 capital goods and services on terms of two years and more establishes basic terms and conditions for Participants WTO Agreement on Subsidy and Countervailing Measures: n n Prohibited export subsidy where government provides contribution of which the benefit is greater than that available from private market Implications: OECD Participants and non-Participants alike can claim safe haven of OECD Arrangement; support on market terms subject to full rigors of WTO SCM

21 The Role of MDBs q q q The rationale for MDBs involvement in export finance is based on the clear linkage between international trade/ investment and economic growth MDBs involvement usually part of a larger trade development or facilitation project Typically there are three basic approaches: n n n 1 Technical assistance either to establish or further develop a facility or institution Direct support, eg for on-lending of working capital to exporters Counter-guarantees or confirmation of L/Cs issued by local banks for purchase of imports for value-added exports

22 What Do Exporters Need?

23 Getting Export Ready “I am assessing my export potential. I need to learn about Export Finance and find sources for assistance”

24 Opportunity Identification “I am ready to pursue export opportunities. I need quality, accessible information; I am willing to invest in acquiring this information, but I lack the financial resources”

25 Tender / Proposal “I am bidding on a contract or negotiating a deal. I need to offer a competitive package to participate in the tender process”

26 Contract Award “I have been awarded a contract, and am now negotiating its content. What contract terms and arrangements related to financing should I be aware of? ”

27 Production “I need to expand my operations or acquire new assets to fulfill the contract. I have a working capital issue” (i. e. I need money to pay for raw materials and/or labour)

28 Payment Period “I need to meet my accounts payable obligations, repay credit lines, loans, etc. , but have yet to get paid for the product/service that I have invoiced for”

29 Conclusions

30 Good reasons for having an ECA q Provide risk protection to exporters / investors q Give access to bank finance for exporters q Provide information, expertise and training q Develop international cooperation, eg multisourcing agreements

31 Bad reasons for having an ECA q Encourage exports to bad credit risks q Provide subsidized working capital q Provide subsidized medium/long term credit q Guarantee local exporters and banks, rather than to take foreign risks