• Business Day (South Africa): Emerging markets

Telecoms
Worldwide a lot of ECA business is related to telecoms. Africa is surprisingly slightly different. Charles Carlson, global head of export finance at Standard Chartered, explains: "A number of the big telecom operators tend to borrow on their own balance sheet and lend directly into their own subsidiaries around Africa. For example, MTC's Nigerian subsidiary was able to raise over $1 billion without support of an ECA."
However, ECAs play a role to the extent that they can support financing in local currency.
"Again, China is a factor. But, doing a deal with a Chinese supplier and Sinosure is still more expensive than a transaction with a European supplier's ECA because the European ECA will have a better credit rating than Sinosure. You would expect because of the entry of Huawei and ZTE to find more Sinosure deals, but while Sinosure's premiums are competitive it comes down to what the lenders will provide," adds Carlson.
At Citi Vukovich adds: "In terms of ECA telecoms financings there are two factors to consider. First there are not too many new licences coming up which limits the number of large project financings coming into the market. The second is the availability of flexible, relatively cheap local currency financing options. We recently closed two financings with Celtel in Zambia and Nigeria with large local currency tranches and we are bringing DFIs to these transactions to add value and longer tenors which they can offer."
In terms of promoting exports though, even when a deal is done without an ECA the actual equipment must still be sourced from somewhere and it is still going to be Motorola or Nokia or Siemens. Such a liquid and dynamic market as telecoms makes this is a very competitive landscape for ECAs and given the way in which they operate, the pricing they offer, and the high country risk premiums compared to the commercial market, they struggle.
Transport infrastructure
Another area in which ECAs are still emerging is transport infrastructure projects. Such projects are expensive to build and it is not always easy to identify the main source of repayments. Carlson at Standard Chartered explains: "If you are building a toll road in Africa the revenues from it are likely to be insufficient to repay the debt, so you need some sort of shortfall guarantee from the government. It comes down to having to dip into the tax base. This works in some countries in Africa but not in others."
Ports and airports are slightly different as there are taxes and charges to be collected from docking and landing. In the developed world probably as much as 40% of the revenues come from the shopping done at an airport, but Africa does not have the same degree of purchasing power. However, the landing charges are in US dollars and a lot of that ends up in the structured trade finance arena as you collect it from IATA and do not need or use an ECA.
"Because there is less use for ECAs for infrastructure projects, this makes it ideal territory for the multilaterals. You need governments to get behind these sort of projects and you need fiscal discipline. The multilaterals and development banks can exercise leverage over the government. For example for an airport to be developed it might be necessary to have a civil aviation law in place which provides a framework for lenders to have rights to overflight payments. Lenders on their own will not have the leverage with host governments to encourage the introduction of such legislation, but multilaterals would not only encourage it, but in some cases also fund it," adds Carlson.
In a related field there is still scope for aircraft purchases and this remains an active area of ECA activity. Similarly Transnet is in the market for locomotives and GE is a likely supplier – both are areas of interest to US Ex-Im and the European ECAs.
Power
If there is one other particularly active area for ECAs it is the power sector. The commodities boom has led to an influx of investment across SSA and power networks are stretched. To develop further and build more advanced industrial units such as aluminium smelters will require huge generation capacity. South Africa's Eskom has $26 billion of projects planned including some in the nuclear power bracket for which Westinghouse is an obvious candidate to supply the reactors. There is more still to do in Botswana, Namibia, Nigeria and Ghana. In Nigeria it is likely to be oil and gas-related as this is now being flared and not put to use.
As with oil and gas JBIC is also signing untied loans in this sector, recently inking a ¥17 billion ($137 million) deal with Eskom. Co-financed by the Bank of Tokyo-Mitsubishi UFJ, and the Tokyo branches of Deutsche Bank, ABN Amro and Citi, with JBIC providing a guarantee for their co-financing portions, the loan will finance the Eastern Grid Transmission and Distribution Facilities Installation Project in the KwaZulu-Natal province; and the Northern Grid Transmission and Distribution Facilities Installation Project in the Limpopo province.
Deutsche Bank's Constable adds: "We're seeing a number of projects close to South Africa in Botswana and Namibia where Eskom is an offtaker. But in the big projects that are being looked at on a project finance basis with ECA support and with a high local cost element, we're seeing structures put together with funds from Japan, untied loans, alongside ECA support to cover imported equipment and local finance from South Africa. This is a very liquid and developed banking market, and whilst they can't fund in the billions they can certainly fund in the hundreds of millions on their own.
"They are reasonably comfortable with the political risk involved in neighbouring markets, especially when you have an offtaker like Eskom involved. In the past year we've looked at a few projects that haven't actually completed yet – in Namibia with Nampower and in Bostwana with a number of power companies there. Almost sort of Middle East-type structures with three or four tranches, combining to a total of one or two billion dollars that is required for the total project."
Those are markets where ECAs have not been involved for the past few years but want to be. The borrowers are quasi-statal companies that the ECAs can get comfortable with quite easily and the projects have a high import content. In the coming years there will be more of this as these countries grow and face up to increased demand.
Local currency
One trend that is becoming more and more apparent is the use of local currency options in traditional ECA territory. Power, cement and telecoms in particular are prime sectors for this as revenues are earned in local currency making it easier to structure repayments without FX risk.
Vukovich at Citi notes: "Local markets are becoming more developed and more liquid, and international investors have become more bullish on local currencies. Many clients in Africa can now fund themselves in this way through either local banks or international investors willing to take the local currency risk, or through the development banks.
"ECAs have been slow to adapt to this situation, but they are increasingly active in this field, though there is still some way to go. This is a bank-led phenomenon with an open dialogue with the ECAs being important, but once again it is a question of flexibility on the part of the ECA."
An ECA writes...
Over the past several years, the Export-Import Bank of the United States (US Ex-Im) has successfully prioritized its efforts in sub-Saharan Africa, as evidenced by a year-to-year increase in actual financing.
The underlining challenge has remained substantially the same since US Ex-Im began its sub-Saharan Africa initiative: How does one measure the creditworthiness of a prospective African borrower? Unfortunately, picking up the phone and calling Dunn & Bradstreet to learn of a prospective borrower's credit rating isn't an available option.
US Ex-Im's strategy to help deal with this challenge is to build upon the bank's successful initiative in Nigeria to foster partnerships with carefully selected local African banks because they best know their own marketplace. The initiative in Nigeria involving 17 local banks has resulted in a special delegated authority facility of more than $400 million.
The bank's goal is to be able to provide affordable medium-term financing in as many African countries as is practical. Towards that end, US Ex-Im is sponsoring an 'African Bankers Seminar' at its Washington, DC, headquarters on September 12-14 in cooperation with the Bankers' Association for Finance and Trade (BAFT) and the Private Export Funding Corporation (Pefco).
In addition to bankers from South Africa and Nigeria with whom US Ex-Im already enjoys a good relationship, local and regional African bankers from Cameroon, Côte d'Ivoire, Equatorial Guinea, Gabon, Ghana, Kenya, Namibia, Niger, Senegal and Tanzania have been invited.
However, US Ex-Im's involvement assumes that there is both a creditworthy African buyer and a willing US seller. The complaint one hears more often than not from prospective African buyers is the lack of US manufacturers marketing themselves in their countries. Sectors identified as most competitive for US exporters range from telecom and housing, to energy, health, environment, and especially transportation-related heavy equipment such as vessels, trucks, buses and aircraft.
The situation is best described as the proverbial 'catch 22': US exporters need to be assured that they can count on US Ex-Im to provide the necessary financing for them to prioritize Africa in their marketing strategies, and US Ex-Im needs US exporters to provide the transactions that the bank can finance. US Ex-Im's management is determined to convince US exporters of the bank's commitment to Africa and the importance to US companies of what is often called "the world's last remaining developing market".
J. Joseph Grandmaison, board member, US Ex-Im
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Features

Mitigating African supply route risk

1,922 words

1 July 2007

Trade Finance

TRAFIN

English

Copyright 2007 Euromoney Institutional Investor PLC
Although there are signs that risk appetite for sub-Saharan Africa is reaching a turning point, with a rising number of investors genuinely looking to invest, ensuring the physical transportation of goods from the farms and processing plants to the ports remains a significant challenge.
"Unfortunately the physical infrastructure of Africa makes it easier to ship from China to Nigeria than it is to go from Tanzania to Nigeria," remarks Scott Stevenson, head of trade operations at the International Finance Corporation (IFC).
Sharing a similar sentiment, James Newman, head of insurance and central and southern African operations at Drum Resources argues that the lack of adequate road and rail links is the greatest risk to trade routes, and is holding back the development of sub-Saharan Africa (SSA) into a viable market able to compete internationally.
"The main problem you have in landlocked African countries is the lack of infrastructure; I think that is the greatest risk there. Around 90% of the roads are impassable in the rainy season, and very often you end up driving material cross-country. There are areas that are war-torn, but these can usually be circumvented by taking alternative routes. The political risk from the war, riots or civil commotions perspective is possibly an exaggerated risk, there are often ways to get round that," he explains.
Until the required level of investment has been made in ensuring more efficient transportation links, better telecommunications and improved provision of power, banks and trading companies are required to carefully consider the risks involved at every step of their product's journey. Their investment does not stop at the farm or factory door.
Potential risks
The list of political and supply route risks in SSA present significant challenges. In the Democratic Republic of Congo (DRC), there are risks of corruption, theft and misappropriation, trade disruption, as well as damage to goods en route.
In Zambia and Zimbabwe there is the potential for theft, deprivation and even sporadic cases of hijack. Trade operations in Nigeria may be disrupted by armed robbery, while confiscation and deprivation threats loom over Cote d'Ivoire, Ghana and Cameroon.
At the start of a particular commodity or manufactured product's journey, one of the first risks is lack of procedural controls at the warehouse itself. Often there is a lack of equipment, which means more manpower is required. However, an increased workforce can lead to greater handling of the goods and the potential for theft. At this stage, the goods in certain states also face the risk of confiscation, nationalization or expropriation. Then once on route, there are the threats of hijack and robbery, as well as the challenge of negotiating the poorly built roads and ensuring that the commodity reaches the ports in good time.
Drum Resources, a risk and collateral management consultancy specializing in SSA business, offers a risk mitigation package that supports the transportation of goods along the entire logistics chain. Through its performance risk management (PRM) product it enforces tight controls on all counterparties or contractors, carefully monitoring all procedural, contractual, and reporting obligations.
At the warehouse, Drum supervises warehouse operations, securing, labeling and stock rotating. It then only releases the goods following an instruction from the client delivered via one of Drum's regional centres in Durban or Lagos, and then monitors the goods' transit to the destination port.
As an example of how the product works, Drum implemented the PRM system with a client operating in the DRC. The client was dealing with a copper producer and wanted to accurately calculate stock levels, have some analysis of the materials stored, and mitigate the risks inherent in the local processing and local transportation of the product.
In this instance, Drum was unable to source a local laboratory that met with the required standards. It ended up introducing the project to an acceptable laboratory elsewhere which was prepared to invest in the project and take on the country risk. Drum then flew out a team from the UK to ensure the installation and operation of a weighbridge to measure the product being transported. It also set up the necessary security at the storage site and factory, and managed the export of the materials to Durban.
During transit, it provided track and trace on the trucks, armed escorts when required, clearance at the borders, receipt into the Durban warehouse for check assay and preparation for export. Through these various management efficiencies, and ensuring the client knew the quantity and quality of the goods being transported, savings were achieved across the supply chain.
Shifting policies and markets
For those managing the supply route management services, their key concern is the ever-changing political risk landscape in Sub-Saharan Africa. "While the risks of political violence and/or war and civil disturbance may be higher in some countries/regions today, the picture may look totally different tomorrow and vice versa," explains Roland Pladet, chief underwriting officer at the African Trade Insurance Agency (ATI).
Drum's James Newman adds; "I think our main concern is the way the rules change. For example in the past in the DRC, in order to obtain an export licence, you used to have the materials assayed by appointed companies. These contracts were awarded, then rescinded, re-awarded and re-rescinded. Then the whole export procedures were changed, and then the type of material you were allowed to take out was changed on an almost daily basis. It is constant change and that's where people come unstuck." To keep on top of these changes, the risk managers and insurers are required to continuously monitor changes in local laws and customs regulations.
However, the African Trade Insurance Agency (ATI) has taken steps to temper some of the unpredictable elements of SSA politics. The agency provides cover for a variety of political risks, and in particular aims to support trade and investment in the agency's African member states: Burundi, DRC, Djibouti, Eritrea, Kenya, Madagascar, Malawi, Rwanda, Tanzania, Uganda and Zambia. All these member states are main shareholders of the insurance agency, and through creating these partnerships, ATI aims to lessen the likelihood that any member state would precipitate an event that would cause a loss to the ATI insured party and the agency.
The level of cooperation between these member countries is set to be further strengthened by certain legal and capital restructuring to be undertaken and completed by the third quarter of this year. It involves the conversion of $135 million in off-balance sheet underwriting capital into the same amount of on-balance sheet true equity capital. Pladet at ATI explains: "These member states have expressed their confidence in each other by de facto assuming political risk on their neighbours. With the pooling of each country's equity contribution, the element of peer pressure has been introduced which further reduces the likelihood of a member state precipitating an event that would cause eventual loss to ATI."
Under the terms of membership, each African ATI member is also legally required to enter into a participation agreement that obligates the member to reimburse for any loss they cause ATI, as a result of a defined political risk. These risks include expropriation and contract frustration but exclude war, civil disturbance and embargo.
New trading partners
Regional partnerships, such as those being fostered by ATI, are in part contributing to the growing interest in the SSA market. "Congo is a point in question. To my knowledge five years ago there was probably only one bank who was prepared to even look at a transaction in the Congo. I can probably name six or seven banks now who would take an enquiry very seriously," observes Newman at Drum.
Of particular interest is the perceived rising influence of Chinese lenders and other Asian players, and their attitudes towards risk.
"The Chinese do not seem to be too concerned by the risk profiles Africa presents. Indians are found trading throughout Africa, and have always had long established roots and businesses, and there appears to be no let up in interest from this business sector. Again they seem less concerned by the high risk profiles of the continent, but have considerable experience in mitigating risk to their own acceptable levels," Newman notes.
However, ATI's Pladet adds: "The flows with Asia (i.e China and India) have significantly increased over the past decade. However, they generally benefit from very strong support from their respective governments, which makes it difficult to assess whether Chinese and Indian investors, traders and/or financiers have a greater risk appetite as compared to their competitors from other regions."
ATI has been involved in providing political risk cover for transactions between SSA and China. For example, co-insuring with Lloyds of London it provided 90% indemnity on a $10 million transaction supporting the provision of supplier credit from Huawei Technologies China to Office Nationale de Telecommunications in Burundi. The deal involved the supply and installation of a GSM network in the capital city of Bujumbura, as well as the installation of a wireless loop network in Burundi's rural area. The four-year policy covered non-payment, pre-delivery political risk, unilateral cancellation, revocation of import licence, war and civil disturbance.
The African insurer also provided cover for another Africa-Asia transaction, supporting the export of flowers from Kenya to markets in Japan, as well as in Europe, Australia, and the Middle East. The $5 million transaction secured in 2005, was reinsured 100% by Atradius. It provided whole turnover credit insurance for the Kenyan firm Redland Roses, securing it against payment default by its buyers. This insurance policy aims to help firms such as Redland Roses secure business in new and niche markets.
Atradius and ATI often work together under a partnership agreement, and at the beginning of this year they jointly issued the first whole turnover credit insurance cover for a Tanzanian firm. The policy covered non-payment due to insolvency or protracted default in relation to the company's estimated annual sales of around $20 million to a mixture of private buyers.
Strengthening regional ties
Investment in infrastructure is one of the key factors to improve the risk profile of SSA, and change the risk perception of the market.
"A lot of financial institutions are giving investment in sub-Saharan Africa serious consideration. But have the gates opened? Yes – possibly they have. But, for instance in the Congo, there have been changes in regulations, concerns over recent elections. People are cautious of all the reforming, the changing customs procedures, the export licences, and this has resulted in a period of slight instability. If that improves – then I can see the floodgates will open," asserts Newman at Drum.
ATI is keen to use its insurance and guarantee programmes to mitigate some of these political risks, and to encourage further regional cooperation and trade. Working alongside groups such as the Common Market for Eastern and Southern Africa (COMESA) and the South African Development Community (SADC), it is targeting countries such as Egypt, Ethiopia, Ghana, Guinea Mali, Mauritius, Mozambique, Nigeria, Senegal, Seychelles, Sierra Leone and Zimbabwe as potential ATI members.
Sudan is a country rife with war and political instability. In March 2007, however, the country took up ATI membership during the agency‚s sixth annual general meeting held in Dar es Salaam. This must be the greatest testament to date of ATI's potential to strengthen regional relations and reduce political risks along the entire supply chain.
Document TRAFIN0020070801e3710000i