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Export Credit Insurance Corporation of South Africa (ECIC)

Overview
The Export Credit Insurance Corporation Ltd (ECIC) is an independent, limited liability company with the Government of South Africa, through the dti, as the sole shareholder.

Strategic goals

• Focusing on customers: providing high quality service to all clients including exporters, financial institutions, investors, host country authorities, buyers
• Enhancing performance: building a high performance organisation, operating on an effective and self-sustaining basis through prudent underwriting and sound risk management practices
• Engaging in strategic alliances: forging partnerships and alliances with other insurers, government agencies and international organisations to complement services and leverage resources
• Providing effective stewardship: consistently utilise sound business, environmental and social principles, applying international best pactice.

The role of the ECIC
The ECIC was established in terms of the Export Credit and Foreign Investments Insurance Act, 1957 as amended.

The principal objective of the Corporation is to facilitate and encourage South African export trade by underwriting bank loans and investments outside the country, in order to enable foreign buyers to purchase capital goods and services from the Republic. To achieve this objective, the Corporation evaluates export credit and foreign investment risks and provides export credit and foreign investment insurance cover on behalf of the Government.

In terms of the Export Credit Agreement concluded between the Government and the ECIC, the Corporation was mandated by Government to enter into contracts of insurance with, or for the benefit of persons carrying on business in South Africa in the course of trade with countries outside South Africa, primarily for medium, long-term export credit and investment insurance.

To meet its obligations in terms of the Export Credit Agreement in a responsible manner, the Corporation performs the following functions:

• Formulate an export credit underwriting policy
• Evaluate potential projects
• Establish rationale for support
• Assess export credit risk
• Structure securities to mitigate risk
• Set country and sector credit limits
• Manage and diversify the export credit risk portfolio

ECIC products
Investment Insurance Protection
A South African entity investing in a foreign entity can be provided with investment cover. To qualify, an investment must adhere to the following criteria:

• It must be a new investment in an existing entity or an entity still to be formed;
• Approval must be obtained from the host country government and the South African Reserve Bank;
• The South African entity must hold at least 26% of the paid up share capital with voting rights in the foreign entity;
• The investment amount must be at least R200 000.

Investment Insurance Coverage

• 90% in respect of Political Risk
• Minimum of 5 years and up to a maximum of 15 years

The insurance cover provided protects the investor against the following possible causes of loss of the investment into the foreign entity, which prevents the foreign business to operate for at least one year or produce profits for three consecutive years:

• The operation of law or of an order, decree or regulation having the force of law issued by any organ of state of the foreign entity's country;
• The occurrence of war in the foreign entity's country;
• The occurrence of armed hostilities, civil war, rebellion, revolution, insurrection, or similar disturbances in the foreign entity's country;
• Nationalisation, expropriation or confiscation by the foreign entity's country government of all or a substantial part of the profit sharing and/or voting shares or any material part of the business or assets of the client.

The cover will be restricted to 90% of the loss. The premium payable in terms of this cover will take into account the following;

• The foreign entity's country where the investment will be made;
• The length of the investment period;
• The amount invested.

Credit Insurance Protection
This insurance cover is linked to export transactions involving capital goods and related services, or undertaking of works of a capital nature in foreign countries. Through the provision of credit insurance to banks, the Corporation facilitates term finance for such transactions/projects.

Insurance cover is provided for losses arising from:
Political Risk Events

• Expropriation - loss incurred due to an expropriatory measure taken by the host government;
• Transfer Restriction - loss incurred due to any action taken by the host government that prevents the conversion of a local currency into SA Rand or US Dollars or the transfer of SA Rand or US Dollars outside that country;
• War and Civil Disturbance - loss incurred due to acts of war, revolution, insurrection, civil war, civil commotion, terrorism and sabotage;
• Breach of Contract - loss incurred due to a material breach, by the host government, of a contract entered into with the host government;
• Protracted Default - payment default by a government borrower/guarantor.

Commercial Risk Events
Insolvency - sequestration, liquidation or judicial management of a borrower;
Protracted Default - an undisputed payment default by a borrower;

The Corporation provides insurance for credits of a minimum of 2 years and up to a maximum of 10 years.

The premium cost relating to credit insurance cover depends on the perceived political and commercial risk in the host country where the goods/project will be delivered; the credit risk assessment of the borrower; and the length of the delivery and repayment period.

Levels of Cover
Credit Insurance Cover of up to 90% of the South African contract value is available provided the South African content as prescribed of at least 50% is achieved.

SA Content consists of:

• The cost of materials and manufactured goods purchased from South African suppliers minus the value of any materials, goods or major components of manufactured goods, which have been imported from sources outside South Africa;
• Wages, salaries and other remuneration paid by the exporter in South Africa to its employees and such portions of wages, salaries and other remuneration payable to the exporter's employees who are performing work outside South Africa, and which is paid by the exporter in South Africa;
• Freight charges paid in South Africa;
• Insurance premiums paid in respect of a policy issued in South Africa;
• Finance charges, excluding any interest for post delivery finance, paid to any financial institution normally operating in South Africa;
• Fees and charges paid for any other services performed in South Africa on the exporter's behalf by a South African resident organisation; and
• Fees and profits accruing to the exporter that have been confirmed by the ECIC/Chartered Accountants for qualification as South African content.

Interest Rates applicable
To enable South African export credit term finance to be internationally competitive, the interest rates made available through participating financial institutions are as follows:

• Rand Contract - a floating interest rate of JIBAR (Johannesburg Inter Bank Agreed Rate) plus margin;
• US dollar Contract - a floating interest rate of LIBOR plus 1.25%, or a fixed interest rate equivalent to the OECD USD CIRR (Commercial Interest Reference Rate).

The US Dollar fixed interest rate valid on the date of the first drawdown under an ECIC supported export credit loan is fixed for duration of the relevant contract period. A participating bank may request the ECIC to fix the USD CIRR rate for a period of 90 days or longer on payment of a prescribed fee.

Foreign Exchange Risk Cover
The ECIC covers export credit loans denominated in South African Rand or US Dollar, as well as the Rand value of foreign investments. In the case of export credit loans denominated in US Dollar, financial institutions are required to raise funding for projects in US Dollar and on-lend to clients in US Dollar, which provides lenders with a natural hedge to mitigate foreign exchange risk.

However, South African contractors who are the beneficiaries of drawdowns under export credit loans for work completed are facing exchange risks in so far as their expenses are Rand denominated. To cater for this risk, South African contractors are allowed to elect which portion of the export contract they would like to receive in Rand. Guaranteed Rates of Exchange, obtained from the South African Reserve Bank are then issued to the contractor to eliminate the impact of currency fluctuations in their pricing during the delivery phase of the project. These rates are used to convert the US Dollar drawdowns or portions thereof, to Rand. For this cover an exchange risk cover premium administered by the ECIC is payable to the South African Reserve Bank.

Underwriting Principles
The ECIC endeavours to avoid burdening developing economies with debt. In pursuance of this objective, the focus is on projects which are sufficiently viable to repay the insured credit finance from the positive cash flow of the project itself. Furthermore, the ECIC adopted the approach that both South Africa and the buyer country should reap meaningful economic benefits from supported projects.

The Corporation is required to, at least, break even over the long term. Its underwriting analysis therefore has to be effective, efficient and sustainable. Often the Corporation is called upon to provide export credit insurance in respect of project finance for green fields projects in other countries, covering both political and commercial (project) risks. Project finance involves a technique where investors and financiers take a risk based on the viability and cash flow of the project itself and not on the financial strength of the borrower or guarantor.

Apart from having to assess country credit risk, the Corporation therefore has to deal with the full spectrum of project credit risks. Typical project risks which the Corporation endeavours to evaluate, assess and mitigate are: project completion risks, technology risks, supply (intake) risk, market (offtake) risks, management risks, maintenance risks, concession risk, conversion risk etc. Once a specific risk mitigant is identified, it is included in the policy as a condition precedent for insurance cover.

An important underwriting principle that needs to be highlighted is the requirement of cash equity by project sponsors. An ECIC supported project needs not only demonstrate viability in terms of appropriate and realistic financial modelling, but the project company needs to be sufficiently capitalised.

Capital can take many forms such as land, buildings, concessions etc, but sufficient cash equity is required as a prerequisite for support of green fields projects. What is regarded as sufficient depends on project circumstances. Generally, cash equity requirements range from about 30% to 50% of project value.

Chairperson	Mr TP Ditshego
CEO	Dr Patrick C Kohlo
Enabling Act	Export Credit and Foreign Investments Insurance Act, 1957 as amended
Tel.	+27 (12) 394 3510
Fax.	+27 (12) 394 3396
Email	cthirion@ecic.co.za
Postal address	PO Box 28177, Sunnyside, 0132