Economic development and protectingtrade: the case for credit insuranceVinco David, Berne Union Secretary General,explores the crucial role that credit insurance hasplayed in the development of cross-border globaltrade, using China and India as case studies.
Editor-in-chief: Jonathan Bell
Editor: Oliver O’Connell
Sub-editor: Carl Morris
Production editor: John Smith
1 Cover story9 Another big year for Venezuela
By Stuart Culverhouse, Chief Economist and Global Head ofFixed Income Research at Exotix.
12 Winds are changing for wind financingEKF reflects on the development of wind financing
14 Radical innovation in trade financeBy Christophe Spoerry, co-founder of the Euler HermesDigital Agency.
17 Marking 60 years of successBy Geetha Muralidhar, Chairman and Managing Director,Export Credit Guaranteee Corporation of India
19 The complementary role of official developmentfinance: some observations and recommendationsBy Paul H.J. Mudde, Consultant of Sustainable Finance &Insurance
30 The case for ECAs’ promotion of sustainabledevelopmentBy the ICC Global Export Finance Committee.
on international trade, finance and investment from the export credit and political risk insurance industry
This newsletter is sponsored by:
IntroductionTrade is an important contributor todevelopment – economic development, atleast. In many developing countries andemerging markets, growth is driven byexports. As the national economies are oftentoo small to propel this growth on their own,this also entails imports of capital goods andthe construction of infrastructure necessaryto enable export. All these goods andservices crossing international borders arethus testament to economic development.Too often, however, these transactions arenot in fact realised, as the risks – paymentrisks of the exporter, in particular – aredeemed too high. There are ways toovercome these (perceived) risks and oneimportant tool in this regard is creditinsurance.
This article is about the importance ofcross-border trade, and how it is stimulatedand supported by credit insurance. First, wewill try to quantify this importance in terms ofincome; subsequently we will explore the roleof credit insurance in economic development.Following this, we will explore the examplesof China and India, and lastly, we will try todraw some conclusions about the relationshipbetween economic development throughexport and credit insurance.
Why trade?World cross-border trade amounted to over$14 trillion in 20161. That is a 14 with 12 zeros –
a staggering amountindeed, and a figurecomposed of addedvalue along all tradechains. Without this,we would have justover $14 trillion lessincome across theglobe. That amountsto about $2,000 perhead, every year. Italso has a cross-over
effect domestically, as foreign trade spursdomestic trade too, via the supply chain toexporters.
The 85 members of the Berne Union – theinsurers of credit and investment riskworldwide – support and protect some 13% ofall cross-border trade. Without their support,this trade would often not take place. Asmentioned, the exporters or their financingbanks would deem the payment risk on theimporter as too high. The transaction wouldthen simply not occur. Trade only happenswhen paid, and without cash or credit it doesnot take place.
Why credit insurance?Not all trade requires protection againstcredit risk. Payment risk in inter-companytrade, or for goods and services paid inadvance, or trade on some spot markets,such as for oil, is negligibly low. But lots ofgoods and services are sold on credit to
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Economic developmentand protecting trade: thecase for credit insuranceBy Vinco David, Berne Union Secretary General.
Vinco David
World cross-border trade amounted to over $14 trillionin 2016. That is a 14 with 12 zeros – a staggering amountindeed, and a figure composed of added value along alltrade chains.
companies or governments, with tenorsranging from one day to over 20 years. Thesedifferent credit terms go hand in hand withthe economic life of the respective goods.Perishable goods, such as fresh meat,vegetables or flowers are typically sold onterms of a week or less. Large infrastructureprojects or ships require a much longerrepayment period. Fortunately, many of these
buyers do pay (although not always withinthe agreed terms). However, it happens toooften that purchases are not being paid for.Hundreds of thousands of companies gobankrupt or are otherwise declared insolvent,every year. Or, depending on the jurisdiction,they simply can no longer afford to pay,without a formal insolvency procedure. In theUS alone – the world’s single largest exportdestination – the number of bankruptcies(not including other insolvencies such asChapter 11 filings) was close to 100,000 in2016. In some emerging markets theincidence of bankruptcy is also high. InVietnam, for instance, more than 60,000companies were declared bankrupt in 2016alone2. Indeed, even governments and state-owned enterprises sometimes fail, often dueto lack of hard currency. Recent examples areTanzania or Gabon: These countries were
strapped of dollars, euros or other convertiblecurrency, partly due to the decline in theprice of the commodities they exported.
In addition to credit insurers, banks,factoring companies and forfaiters can alsoabsorb payment risk for exporters. This allcomes at a price, of course, and there is some– but not much – price competition betweenthe various instruments. But factoring,forfaiting, letters of credit or the discountingof bills of exchange do not eliminate everypayment risk. What if you are manufacturingtailor made goods and your buyer goes bustbefore you can supply these? In such a casethere will usually not be any receivable to sell,or any draw-down under a bank’s L/C. If yourgoods are commodities, you can probably re-sell these to another buyer at a reasonableprice, but what to do with customisedgoods? Or what if your financier has recourseagainst you in case the buyer does not pay?Furthermore, in transactions with morecomplex payment terms, such as for projectfinance deals or infrastructure, the relativelystandardised solutions typical in factoring orforfaiting are often unsuitable.
Credit insurance, bank financing for export,forfaiting and factoring (including supplychain finance) each have their own meritsand are more complementary thancompetitive. Credit insurance works well forstandard as well as more complex paymentterms, and terms, and can also cover so-called pre-credit risk. It is noteworthy thatmany banks and factoring companies alsomake use of credit insurance to protectagainst payment risks when financingexports. This allows them to protect theirbalance sheet and often also leads to lowerregulatory capital requirements. The exportermay not even be aware of this creditinsurance at the backdoor of its financier.
Credit insurance not only protectsexporters against payment risk – therebycontributing to the continuity of thesecompanies – it also unlocks commercialfinancing for trade and investment that wouldotherwise often not be available. It is this
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In addition to credit insurers, banks, factoringcompanies and forfaiters can also absorb payment riskfor exporters. This all comes at a price, of course, andthere is some – but not much – price competitionbetween the various instruments.
Credit insurance not onlyprotects exporters againstpayment risk – therebycontributing to thecontinuity of thesecompanies – it alsounlocks commercialfinancing for trade andinvestment that wouldotherwise often not beavailable.
finance-catalysing aspect of credit insurancethat is of greatest importance todevelopment. Increasing the growth potentialof developing countries requires many capitalequipment and infrastructure investments forwhich reliable financing is essential. Publicfinancing alone is often not sufficient toenable this, and commercial financingsupported by credit insurance is therefore animportant contributor to close the financinggap for development.
What private and public creditinsurers contribute to world tradeCredit insurance can be provided by privatecompanies, public agencies and multilateralinstitutions. All three groups of providers areimportant for development. As time haspassed, their roles and market shares havechanged.
Just over half of the near $2 trillion in cross-border trade that credit insurers support iscurrently covered by the private market. Bignames are e.g. EulerHermes, Atradius, Coface,Zurich, Liberty, XL Catlin or Chubb, as well assome specialist Lloyds syndicates. But thereare also quite a number of other privateinsurers. Some of these insurers havedeveloped credit insurance as their specialism(such as the first three companies mentioned,the so-called monolines), others are generalinsurers – which, by the way, makes themtherefore better known with the general public– that provide credit insurance as just one oftheir (many) insurance lines. In total, there aresome 60 private providers of credit insuranceworldwide.
The role of private insurersTraditionally the role of private credit insurerswas limited to the insurance of trade credit –i.e. credits of up to one or two years – forboth domestic trade and for export. Theseshorter credit terms typically apply tocommodities, consumables or other goodswith a relatively low unit value. In addition,their customer base was usually confined tocompanies in developed countries. Thissituation gradually began to change aroundtwo decades ago as private insurers startedto expand their business both in terms ofcustomer base and in terms of credit tenorsthey could support.
Some of them have, indeed, branched outto emerging markets, setting up offices tosupport local companies and local subsidiariesof multinationals. New online opportunitieshave facilitated this expansion as well.
In addition, private insurers have stretchedthe tenors they can support to even beyond10 years, including for e.g. infrastructure,telecom and mining projects in emergingmarkets. This appetite for longer tenors hadalready started before the credit crisis at theend of the last decade, but really took offafter that. This was partly a result of theprivate sector’s increasing confidence as theygained experience and familiarity with longerrisks, but risks, but was also encouraged byincreasing flows of liquidity. This supply ofcapital, in turn, is partly a consequence of thehistorically low interest rates presentlyprevailing in developed countries. Investorsare seeking higher returns than they can geton traditional assets – government bonds, forinstance. Investment in credit and politicalrisk insurance – arguably also in other lines ofinsurance – can provide these higher returns.One may wonder what will happen if interestrates start to rise again. It may well end up inless capital flowing to the insurance market –including credit insurance – and thuspotentially contracting private creditinsurance capacity in future. However, even ifliquidity decreased, given the current over-liquidity in the market, there would still seemto be sufficient capital remaining to meetdemand from exporters and banks for theforeseeable future (see Figure 1).
The role of public insurersDespite the expansion of the remit of privateinsurers, there is still a large role to play forpublic insurers. National export credit insurersare also referred to as Export Credit Agencies(ECAs). Some of the largest ECAs includeSinosure (China), the public arm of Euler
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Figure 1: Berne Union New Business, Private & Public
ST: Short Term, insurance for credits up to 1 yearMLT: Medium and Long Term: Insurance for credits of 1 year and overINV: Investment Insurance – all figures in USD billions
Hermes (Germany), NEXI (Japan), Bpifrance(France), SACE (Italy), K-Sure (Korea) andECGC (India). An increasing number ofdeveloping countries, including many in Asia,have set up ECAs to support their nationalexports. In addition to ECAs, but to a lesserextent, some multilaterals also provide coverfacilities for cross-border trade.
Although competition does sometimesoccur between public and private insurers,their roles are largely complementary. Onecan safely say that cover for short term creditof exporters in developed markets, to buyersin developed markets, is largely in the domainof private insurers. At the other end of thetrade spectrum – long term credits for capitalequipment transactions and infrastructureprojects commissioned by buyers indeveloping countries and supplied bycompanies in developing countries (so-calledSouth-South trade) – only public insurers arereally at play. Between these two extremes ofthe spectrum it often depends on theparticular circumstances, who is best fit toprovide the cover against payment default. Inthis context, the balance tends to shift toECAs when tenors are longer and buyercountries are riskier.
It is important to note here that ECAs donot have a development objective per se. It israther through supporting trade andinvestment that they contribute todevelopment. In line with this, they do notsubsidise the exports they cover. Accordingto international regulation they are not evenallowed to subsidise trade. Premium incomemust on the long term at least cover claimspayments and administrative costs. This isenshrined in WTO regulation that applies toall WTO member countries3. This requirementis codified in European Union and OECDregulation, but it, by virtue of their nationalWTO membership, also applies to ECAs indeveloping countries and other non-OECDcountries. This brings us to the next topic:The role of ECAs in low and middle-incomecountries.
The role of ECAs in low and middle-income countriesThe world’s first ECAs were set up in Europesoon after the first World War ended – now acentury ago. European countries, ravaged orimpoverished by war, realised that supportingtheir exporters was an effective way to gettheir economies back on track. By the mid-nineteen sixties, almost all industrialisedcountries had a national ECA. At that time,only a handful of developing countries,including India, had set up an ECA. Althoughthe circumstances today may not be asdramatic as in the aftermath of the firstWorld War, the argument that ECAs are aneffective way to stimulate the economy still
holds; and just as much so for low andmiddle-income countries. This is especiallytrue for some smaller developing countries inwhich credit insurance from commercialproviders is not available; or is only availablein a very limited way. Indeed, sincecommercial insurers require a certain mass tomake their business financially sustainable,they may not always be interested in makingtheir products available in these smaller,
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This growth in China’s exports is even more remarkablewhen it is noted that this period includes the globalfinancial crisis, when in 2009 Chinese exports droppedby a staggering $230 billion compared to 2008, butnevertheless quite in line with the drop in world exportsin that year.
Shifting the focus back toIndia, a measure topromote exports shouldbe mentioned. In 1957,India set up its ECA, theECGC. Over the yearsECGC has expanded itsportfolio, and it is now oneof Asia’s largest ECAs,particularly in the tradeexport credit area (i.e.credits up to one year).
developing economies.Today, most major middle-income
countries and some lower-income countrieshave ECAs. A key stimulus to theestablishment of new ECAs was the collapseof Comecon and break-up of the SovietUnion shortly after. Suddenly Central andEastern European countries and formerSoviet states in Central Asia had to adapttheir previously centrally led economies to amarket economy. That was a huge, difficultand painful transition. With the help of theEuropean Bank for Reconstruction andDevelopment (EBRD) and sovereign donorssuch as Korea and the Netherlands, ECAswere soon established in a number of thesecountries. These ECAs were critical to enablethe transition to commercial export in aglobal, competitive market for former statecompanies and new start-ups alike. TheBerne Union assisted in this process bycreating a platform for training and exchangeof business information between the newlyestablished ECAs: the so-called Prague Club.Since its inception in 1993, the Prague Clubhas expanded to become a thriving platformfor ECA start-ups and scale-ups worldwide.To date it has 39 members, 11 of which aredomiciled in Asia, and as of 2016, it is a fullyintegrated committee of the Berne Union.
The volume of exports insured by PragueClub members has grown fast. By the turn ofthis century, their figure for annual newbusiness was just $1.2 billion in total. By 2016this insured volume had risen to $37.8 billion –an impressive growth indeed. The largestPrague Club members are Exiar (Russia),ICIEC (a subsidiary of the IslamicDevelopment Bank), SID Banka (Slovenia)and KUKE (Poland). SID Banka is quite largerelative to the size of the Slovenian economy,as it has grown strongly over the years andoffers a very wide range of services toSlovenian exporters (see Figure 2).
ECAs in Asia: China and India asexamplesFocussing on Asia, we can see a landscapewhich is different from either Europe or NorthAmerica. Although there are some private orsemi-private insurers selling credit insurance –such as Tokio Marine, PICC, and some creditinsurers originally from Europe – throughoutAsia, the credit insurance landscape isdominated by ECAs. In addition to PragueClub members, there are also a number ofmore established ECAs, including theaforementioned Sinosure, NEXI, K-Sure and
ECGC (see Figures 3 and 4).The dominance of ECAs in Asia may have
many causes. One is that many Asiancountries – with the notable exception ofJapan – started their industrialisation, and thesubsequent economic development leap,later than most Western economies. To catchup with industrialised countries, export was
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Figure 2: Prague Club Committee Insured Exports (figuresin USD billions)
Figure 3: RCG (Established Asian ECAs) as a share of totalBerne Union New ST Business – USD billions
Figure 4: RCG (Established Asian ECAs) as a share of totalBerne Union New MLT Business – USD billions
necessary and for this export, ECAs wereuseful tools in the hands of governments.
Another reason may be that in some Asiancountries, even after a development leap,ECAs continue to be seen as instruments forthe execution of national economic policy –more so than in many Western countries.
Sinosure for example, is one of the policyinstitutions underpinning the ChineseGovernment’s Belt and Road initiative.
ChinaLet’s take the Chinese example further. Untilquite recently China’s economic growth waslargely driven by exports. In 2007, exportstotalled $1.2 trillion . In 2016, this had risen to$2.1 trillion : A growth of 75% in ten years(disregarding the impact of inflation andcurrency exchange movements between thedollar and the renminbi)4.
This growth in China’s exports is evenmore remarkable when it is noted that thisperiod includes the global financial crisis,when in 2009 Chinese exports dropped by astaggering $230 billion compared to 2008,but nevertheless quite in line with the drop inworld exports in that year. Growth was suchthat already by 2010 exports had reboundedstrongly to achieve record levels. It alsoincludes the years 2015 and 2016, when worldtrade expressed in US dollar terms decreased,including China’s exports. (Note: this was notso much a drop in the actual physical volumeof world trade, but, rather, a drop in dollarprices of these goods.)
We can see even faster growth in businesscovered by Sinosure (see Figures 5 and 6).
In 2007, their new export credit insurancevolume totalled $33.4 dollars. By 2016, thishad risen to $396.3.5 dollars5.
From this data we can deduct a strongcorrelation between export volume at the onehand and export credit insurance volume atthe other hand, whereby the share of creditinsurance is even accelerating. This can beexpressed as the penetration rate of Sinosurecover in China’s exports, which has grownfrom 2.6% in 2007 to 18.0% in 2016. Thegrowth in export credit insurance is,therefore, a good, even leveraged, indicatorof growth in export and, consequently,growth in economic development, at least inthis Chinese example (see Figure 7).
IndiaIndia, at least until a few years ago, followed arather different economic policy to China.Although there were measures to stimulateexports, much effort was also put intoprotecting domestic production. In addition,economic and fiscal policy in India hastraditionally been more decentralised than inChina.
As a consequence, India’s economy ismore domestically driven. Additionally, the
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Figure 7: Penetration rate of Sinosure cover relative toChinese exports (Left hand scale in millions USD)
Figure 5: Sinosure new commitments (Short Term credits)20007-2016 – USD millions
Figure 6: Sinosure new commitments (Medium/Long Termcredits) 20007-2016, in millions USD
export volume, and its contribution to GDP, isconsiderably lower than China’s. In 2007,Indian exports totalled $252 billion; in 2016this had risen to $434 billion6 - a significantrise of 72%, i.e. similar of that of China, but ata lower absolute level. Also, if we consider thecontribution of exports to GDP, thentraditionally this share was higher for Chinathan for India. In 2007, e.g., this was 36% forChina and 21% for India. By contrast, in 2016,the percentage for India is slightly lower, i.e.19%. While in China, during the same perioddropped to 20%, a figure now similar withthat of India. This is clearly a sign thateconomic growth in China has shiftedsomewhat to domestic consumption, as aresult of Chinese government policy tobecome less dependent on exports (seeFigure 8).
Shifting the focus back to India, a measureto promote exports should be mentioned. In1957, India set up its ECA, the ECGC. Over theyears ECGC has expanded its portfolio, and itis now one of Asia’s largest ECAs, particularlyin the trade export credit area (i.e. credits upto one year). Over the last few years, itspenetration grade has remained consistent ataround 10% of national exports. Compared toChina, we can see a drop in export value in2015, following the decrease in commodityprocess. However, in 2016 India managed togrow its export value again.
A large part of their support is directlyfrom banks that finance exporters. While thisis common practice for export finance (i.e.bank financing with tenors over 1 year), ECGCalso provides this for shorter trade credits. Asmost world trade is on short term credit, thisinstrument has made a considerable impacton India’s export performance. With ECGC’sprotection, banks – often wary of financingwithout meaningful or concrete collateral –are more willing to finance even SME’sexports (see Figure 9).
ConclusionTrade is an important contributor toeconomic growth and thus also economicdevelopment. Given the small size ofdomestic markets for many low and middle-income countries, further development oftheir economies must be undertaken throughexports. Especially goods and services thatadd value along the production chain (e.g.processed and manufactured goods). Wehave also seen large middle-incomecountries, like China and India, equally benefitfrom exports of goods and services as a
driver for growth and development. Creditinsurance is an important facilitator forfinancially sustainable exports such as higherend goods and services. Not only does itprotect the exporters’ balance sheet, but canenable essential bank financing for workingcapital or during the credit period. Followingthe example of industrialised countries, manylow and middle-income countries have,therefore, set up public schemes for exportcredit insurance. As China and India’sexample have demonstrated, growth ofexports goes hand-in-hand with growth incredit insurance. �
Notes1 UN Comtrade, World Bank and ITC statistics.2 Dun & Bradstreet, Global Bankruptcy Report 2017.3 WTO Agreement on Subsidies and Countervailing
Measures.4 World Bank data.5 Berne Union data.6 World Bank data.
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Figure 9: Penetration rate of ECGC new business relative toIndian exports – USD millions
Figure 8: ECGC New Business 2012 – 2016 in millions USD
ST: short term cover to exportersST ECIB: short term cover to banksMLT: medium/long term cover to banks
Political turmoil continuesPerhaps emerging markets in 2017 will beremembered as the year in which Venezuela’smuddle-through strategy came to an end. Wesuspect the announcement of the debtrestructuring on 2 November was promptedby the imposition of US sanctions in July,cutting Venezuela off from sources ofinternational finance and leading to a sharpdrop in its exports to the US. The USsanctions regime now targets 44 individuals,with the EU equivalent targeting seven, andthey could well be broadened and extended,as we discuss below.
The next major event to watch is the snappresidential election recently announced forApril 22. The highest-profile rivals toPresident Nicolas Maduro – Leopoldo Lopezand Henrique Capriles – are barred fromstanding and opposition groups have saidthey will boycott the poll. Maduro hopes theelection, and the opposition’s disarray, willallow him to consolidate his power, but it willnot bring an end to the popular protests andthe international condemnation.
Mysterious payment strategySince the government announced itsintention to restructure its foreign debt,nothing much has happened regardingsovereign repayments, aside from the recent news about the “Petro”cryptocurrency. It still isn’t clear what thestrategy is, and even if it has one.
After not paying its bonds, and thenseemingly paying some and not others, in or
after the grace period,the government hasfallen into selectivedefault on itssovereign bonds, andwhile it seeminglyprioritised paymentson PDVSA (the state-owned oil and naturalgas company) bonds,even these have fallen
into default too. By January, Venezuela was in default on
eight sovereign bonds, according to S&P,which we calculate to amount to US$700mnin overdue interest payments (Figure 1). Thisis half of its 16 bonds.
If this path continues, Venezuela will be indefault on all its sovereign bonds by the endof April!
Figure 1: Sovereign bonds in selective default
Interest due Due date Bond (US$ mn)13-Oct VENZ 19s 9713-Oct VENZ 24s 10321-Oct VENZ 25s 6121-Oct VENZ 26s 17607-Nov VENZ 23s 9007-Nov VENZ 28s 9301-Dec VENZ 18s 3509-Dec VENZ 20s 45
700Source: S&P, Bloomberg, Exotix
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Another big year for VenezuelaVenezuela was one of our themes of last year, and we expect it will bethis year too. The key questions are, could the country finally succumband formally declare a default on its foreign debt in 2018, who will winthe elections now set for April and how will the developing sanctionsregime play into this? By Stuart Culverhouse, Chief Economist andGlobal Head of Fixed Income Research at Exotix.
Stuart Culverhouse
Since the government announced its intention torestructure its foreign debt, nothing much has happenedregarding sovereign repayments, aside from the recentnews about the “Petro” cryptocurrency.
Bondholders have been patient, but it is notclear how long this patience will last,especially if Venezuela is in default on allsovereign bonds, as some PDVSA holders getpaid, which arguably undermines their ownrecovery prospects. Perhaps the governmentis formulating its strategy and will announceits plans in coming months, or it is justplaying it by ear until either rising oil prices,Russia or China save it, or it cannot continueany longer?
The next principal payment is ELECAR inApril (US$650mn), although this is notregarded as posing a risk to thesovereign/PDVSA complex; after that, therewould be a wait until the next sovereignprincipal payment in August. The governmentmight also be waiting to see what happens at
the election. Venezuela’s sovereign bonds are off their
(all-time) lows, hit over the turn of this year,but generally are in the range of 20-30 (withthe exception of the three 2018 maturities,which are around 30-40). The bonds havefallen by more than we thought, but we stilllike the longer, low cash price bonds (2038sare around 27), as we see recovery values ofaround 40 (even in a downside scenario).However, with non-payment of coupons, anduncertainty over how long this will last, theremight not be any rush for them right now,absent any more information on thegovernment’s payment or restructuring plans.
PDVSA bonds are a bit more complicated.With current prices for the non-collateralisedbonds in the 20-30s, they have limiteddownside, and possibly more upside ifPDVSA holders manage to get goodrecoveries either through: (i) a US bankruptcyprocess; or (ii) by successfully appendingthemselves to a sovereign deal. But theycould be zeroed too. (see Figure 2)
The sanctions imposed on Venezuela bythe US administration and the EU, targetingnumerous individuals, including Maduro, withasset freezes and prohibitions on US citizensfrom dealing with them, are an importantbackdrop to these bond payment questions.
To the extent that these targeted measuresbite, they may weaken support for Maduroover time. Personal sanctions make it harderfor the elite to benefit from corruption andincrease the punishment associated with it.But, as the experience of sanctions elsewhereshows, it can take a long time to achieve thedesired effect.
If they don’t appear to work, as the US haswarned, sanctions could be escalated toinclude even more members or formermembers of the regime, diplomatic sanctions,or trade and financial sanctions. All optionsappear to be on the table, and this couldinvolve more direct or other less visiblemeasures.
Perhaps the most direct measure would bea ban on Venezuelan oil exports to the US(see Figures 3 and 4 for the importance ofthe US market to Venezuela), but it couldencompass other measures such as a ban onUS exports to Venezuela, banning paymentsfor exports, freezing US$ transactions byPDVSA, divesting Citgo (a US refinermajority-owned by PDVSA) or evenprohibiting lending to the government. Thesituation is far from straightforward (seeFigure 3).
Source: US EIA, Exotix calculations. Imports from Venezuela of crude oil and petroleumproducts (excluding US Virgin Islands’ imports). *Average from Jan-Nov 2017
Potential impact of trade sanctionsWith the US appearing to be ruling nothingout, and Maduro unlikely to change course,the threat of trade sanctions would appear tobe growing. It may not come to it in the end,but trade sanctions – especially a ban onVenezuelan oil imports – would raise severalissues for both sides. The US market isimportant to Venezuela, but Venezuela is alsoimportant to the US (although perhaps not inequal measure). Beyond the economics, thehumanitarian situation and risk of collapse areother considerations.
From Venezuela's perspective, the US is itsmost important export market (in terms ofcash sales). Venezuela exported about 2.1mnbpd (crude and petroleum products) in 2016,according to OPEC data. Of this, c40% wentto the US. EIA data show that US imports ofVenezuelan oil averaged 809k bpd in 2016(the rate fell to an average of 755k bpd in Q117, but jumped to 857k bpd in April). The USis followed by China (which imported anaverage of 420k bpd of oil in 2016) and India(imports of 390k bpd), based on ourcalculations using own country import data.
Source: IMF DOTS. *One can assume most of this is oil. Wethink the Netherlands Antilles and Singapore are refiningcentres for re-export, so not necessarily indicative of thefinal destination.
In the face of a US ban on Venezuelan oilimports, Venezuela might try to divert its oilto other markets, but we're not sure it will beable easily (and quickly) to do this.
First, it's a question of size. It seemsunlikely that China and India could eitherindividually or together quickly absorb theamount of oil currently destined for the USmarket, and given other markets' imports ofVenezuelan oil tail off very sharply after theseit is not clear anyone else can fill the gap. Andeven if China and India wanted to, is itfeasible for them to take more Venezuela oiland would they have the refining capacity?Alternatively, Russia may come into play.Some 500k-600k bpd of oil go to China and
Russia to repay debts, according to researchcited by Bloomberg, but similar argumentsabout capacity and feasibility would apply.
Second, it's a question of quality. Not allmarkets can take heavy Venezuela oil, soalternatives are limited in any case. This couldresult in Venezuelan oil being sold at a
greater discount, so there could be anadverse impact on oil export revenues even ifVenezuela can sell its oil elsewhere. And ifother nations, in Latin America, Europe orAsia choose to follow suit with US sanctions,the options to divert oil exports elsewherewould be even more limited.
Would trade sanctions work anyway?Markets may expect that trade sanctions –cutting off Venezuela’s only source of FX –will precipitate a hard default andrestructuring, and perhaps bring about thecollapse of the government.
We also make three observations: 1. The impact of extending sanctions may
not be immediate as the government findsways around them and relies more on itsfriends. There are examples wherebygovernments have continued to muddlethrough even in the face of tight sanctions(for example, Zimbabwe, where we notethere were nearly 190 individuals and entitieson the US Treasury’s list of SpeciallyDesignated Nationals).
2. Their effectiveness will also depend onwhether they are bilateral or part of a widercoordinated international effort, althoughthey might be difficult to get broader supportfor.
3. While the intention of sanctions may beto deliver regime change, there might besome concern in the international community(especially, we think, in Europe) about whatwould follow and doubts this can bemanaged in a smooth way. �
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With the US appearing tobe ruling nothing out, andMaduro unlikely to changecourse, the threat of tradesanctions would appear tobe growing.
Wind energy has developed rapidly over thelast two decades. From a small industry thatfew believed would ever become more than amarginal source of energy to a promising,grand-scale industry offering importantcontribution to the green transition.
One ECA stands out as the one that hasbeen part of the journey since the birth of themodern wind industry: EKF Denmark’s Export Credit Agency. They have beenlabelled The green ECA, because wind makesup more than 60 percent of their portfolio.EKF has contributed to the financing of windprojects totalling EUR 20 billion during thepast 14 years. Consequently, in 2016, EKFcovered more than 50% of the totalrenewable energy commitments amongOECD ECAs.
However, winds are changing in theindustry, and EKF is changing with them.
An expanding source of energyFor many years, wind energy was heavilydependent on government subsidies.However, as a result of strong competitionand technological advances in the industry,wind energy has increasingly becomecompetitive in its own right compared tofossil fuel-based energy and nuclear power.This is stimulating demand and assisting thetransition towards a sustainable energyfuture.
Onshore wind capacity is expected to
grow by more than250 GW from now onto 2022,corresponding to 50%of the presentcapacity. The offshoreindustry is still muchsmaller than onshore,but the expectedexpansion of 34 GWwill double thepresent capacity.
Projects exposed to new risksAs the industry matured, and as thetechnology became more efficient andreliable, investor interest increased. In theirsearch for yield, many equity funds andinstitutional investors have come on boardattracted by the stable cash flow andgenerous subsidies offered by wind projects.
However, the financing conditions arechanging rapidly in these years, not least inthe Western world. Licenses for new projectsare increasingly obtained via auctions whichare driving down the need for subsidies.Simultaneously, regulators and offtakersrequire projects to carry part of the risk ofchanging electricity prices and fluctuations inwind production. Dealing with these risks is achallenge to lenders.
“New structures in the financing modelsare introduced to mitigate these new risks.
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Winds are changingfor wind financingEKF has played a crucial role in the development of wind financing –a sector that continues to evolve to face new challenges.
Christian Ølgaard
For many years, wind energy was heavily dependent ongovernment subsidies. However, as a result of strongcompetition and technological advances in the industry,wind energy has increasingly become competitive in itsown right compared to fossil fuel-based energy andnuclear power.
Creativity is warranted as projects are bankedupon confidence in their ability to service thedebt,” says Christian Ølgaard, deputy CEOand head of client services in EKF.
Offshore power plantsSize matters and wind farms, especiallyoffshore, are no exception. In the last decade,EKF has been involved in financing some ofthe largest offshore wind farms off the coastsof England, Scotland, Belgium, Holland andGermany. The 500 MW Walney Extensionsituated at the west coast of England – theworld’s largest offshore wind farm to date is arecent example.
“14 years ago, we financed wind turbines.Then we financed wind farms. Nowadays weare just one among a group of lendersfinancing power plants that can supplyseveral hundred-thousand households withgreen energy,” says Ølgaard.
The UK plans to build more and evenlarger offshore farms above 1 GW – thussupplying more than a million homes withgreen energy.
“We believe that there is still a role for EKFto play in Europe. The scale of project costscalls for numerous financing sources andgiven our experience in wind financing, westill have much to offer,” says Ølgaard.
He adds. “That offshore wind in NorthernEurope is now a well-developed market doesnot mean that the risk is lower than it was 14years ago. A strong political commitment,including a government-supported fixedprice offtake agreement, backed the firstoffshore wind farms. Since then, constructionand technology risks have diminished,whereas the market risks have increased.”
National policies and targets for greenenergy supply combined with the lack ofempty land suitable for larger and moreefficient wind farms have been the drivingfactors for offshore wind in Northern Europe.The same factors are expected to drive thenew offshore markets in Taiwan, the USA,South Korea, Japan and China in the comingyears. EKF stands ready to expand our scope.
“Denmark has a stronghold in offshore
wind. As long as it benefits the Danishoffshore industry, we are ready to follow ourproducers into the new markets,” Ølgaardexplains.
Onshore wind expanding intoemerging marketsOnshore wind, on the other hand, is cheaper,having had a much more global presence formany years. With its improvedcompetitiveness, onshore wind is increasinglymoving into emerging countries. In theseparts of the world, wind investments aremore about satisfying the constant growingdemand for energy rather than meetingpolicy targets for green energy supplies.
Several emerging countries like Argentina,Pakistan, Egypt, Kenya and Mongolia haveembarked upon an expansion of onshorewind capacity. However, these markets stillsuffer from a shortage of finance as thecommercial banks are neither willing nor ableto offer financing without significantparticipation from non-commercial playerssuch as ECAs, IFIs and DFIs.
EKF is witnessing a significant rise in thedemand for financing in emerging markets.However, putting together a financingpackage in the emerging markets is often achallenging and time-consuming process.
“Although it is important to us to assist ourexporters into the emerging markets, we alsohave to acknowledge that the risks, bothcommercial and political, are often significant.In the most difficult cases we seekpartnerships with other non-commercialplayers to ensure a strong group of lenders,”says Ølgaard. �
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“Although it is important to us to assist our exportersinto the emerging markets, we also have toacknowledge that the risks, both commercial andpolitical, are often significant. In the most difficult caseswe seek partnerships with other non-commercialplayers to ensure a strong group of lenders.”
The UK plans to buildmore and even largeroffshore farms above 1 GW– thus supplying morethan a million homes withgreen energy.
Digital technologies and innovations arereshaping the world of trade finance. Whileless prominent than in business to consumer(B2C) financial services, our industry and itscustomers’ expectations are changingdramatically – at a rapid pace neverexperienced before.
Credit insurer Euler Hermes established itsown internal, yet independent, digital agency(EHDA) two years ago to further its digitalleadership in tomorrow's global B2B data andfinancial services. In considering three keyquestions about the ‘most likely’ radicalchanges expected in the next five years,EHDA has created a snapshot of theirpotential impact and how their combinedeffects could further accelerate change:
1. Big data & artificial intelligence (AI)Our clients increasingly have access tosignificant volumes of meaningful data,analytics and artificial intelligence. What willthe role of a trade insurer be if clients canself-insure and make informed credit riskdecisions themselves?
2. Platformisation of B2B commerceIn a world where a significant proportion ofgoods and services are traded on digitalplatforms, including electronic contracts, e-invoices, smart payments, and full access tothe behavioral patterns of all buyers andsellers across the platform, where does creditrisk insurance come into the picture? Whatabout other trade-related risks?
3. Product substitutionTrade finance is on the verge of theexponential change many other sectors –mobile phones, media and transport – havealready faced. After years of limitedinnovation in trade finance instruments, slowadoption of invoicing networks and sluggishsupply chain progress, a new door is openingto a future full of creative financial solutionsubstitute products. When game-changing
technologies andcatalysts such as bigdata, blockchain,cheap funding andthe cloudrevolutionise ourindustry, who will stillbuy credit insuranceand under whatconditions?
Time to throw in the towel?Quite the opposite – it’s a time of immenseopportunity! As a global market and thoughtleader, Euler Hermes is actively pursuingdeep digital transformations to digitise itscore offering, enhance its business model andexploit the many new opportunities that lieahead.
To capture the opportunities, when EulerHermes created the EHDA in July 2015, it wasinitially an innovation lab co-founded by LouisCarbonnier and Christophe Spoerry, reportingto the group CEO. EHDA works closely with awide range of leading experts inside andoutside the business, particularly focusing onexceptionally innovative start-ups in datascience, blockchain and supply chain finance.EHDA’s central aim is to reinvent trade financeand position Euler Hermes as the digitalleader in B2B trade and financial services.
EHDA was founded with three coremissions:
1. Monitor and evaluate trends, especiallynew technologies and potential disruptions
2. Establish a competence center withexpertise in digital transformation
3. Create an incubator for digitalinnovation and experimentation
Over the past two years, EHDA has begunidentifying promising new opportunities –including new technologies, services,processes and partnerships – that will helpshape the future of credit insurance and thetrade finance sector.
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Radical innovation intrade financeBy Christophe Spoerry, co-founder of the Euler Hermes Digital Agency.
Christophe Spoerry
As an industry, we can better serve clientsand sustain profitability by changing the waywe distribute and develop products, predict,price and underwrite risk. Ultimately, thequestion is whether this can lead to solutionsserving a wider portion of B2B trade than thecurrent 5% of businesses leveraging creditinsurance?
Believing in reinventing existing serviceswhile also investing in disruptive servicesincluding ‘plug and play’ data and serviceplatforms, EHDA is forging partnerships withinnovators. The goal: position Euler Hermesas the preferred facilitating partner, frominvestment to market access, for B2B fintechstart-ups and data platforms.
To better support the global accelerationof Euler Hermes’ digital transformation, EHDAhas grown rapidly with experienced teamsnow in France, Hong Kong, the UK and theUS. Their activities include:� The Innovation Lab: Incubates disruptive
ideas for trade finance, with a globalnetwork of innovators and start-up partners
� The New Business Factory: Verticallyscales successful experiments validated inthe Innovation Lab, and transforms theminto sustainable new tech-powered lines ofbusiness in partnership with Euler Hermes’business units
� Spinoffs: Vertically scales selectedsuccessful experiments validated in theInnovation Lab, to enable them grow withthe support of leading externalentrepreneurs
� The Data Lab: Leverages artificialintelligence and advanced data science;identifies new data sources to improveEuler Hermes’ grading, underwriting andmarketing activity
� Digital Culture: Fosters digitaltransformation and awareness across thecompany.
How does Euler Hermes attractinnovators?It took EHDA just 12 months to build thefoundations for a sustainable innovationplatform by creating two-way porositybetween the world of credit insurance andthe ecosystems of innovation. While the tradefinance industry could be seen to traditionallyoperate in something of a vacuum, EulerHermes views its industry as a greatecosystem, full of opportunities. EHDA’s firstpriority, therefore, was to create porosity tolet positive innovators infiltrate the ecosystemand, step-by-step, enrich and develop it.
Creating two-way porosityDuring its first year EHDA explained thefundamental concepts of credit managementand insurance to hundreds of innovators.Listening to customers, we designed valuepropositions with them and for them,unleashed the teams’ creativity, opened APIsinto Euler Hermes assets and made companydata accessible in innovative ways. We also
created many partnerships in Silicon Valleyand other innovation hubs in countriesincluding France, Germany, Hong Kong,Sweden, the UK and the US. Providing thefoundations of a scalable platform forinnovation accelerated positive porositywithin the trade credit ecosystem.
Getting innovators interested in thatecosystem was not enough in itself — EHDAalso had to interest the broader Euler Hermesemployee base in the world of innovators.The founding Digital Agency team threepeople acted as translators and interpreters;adding scalability was key to maximising thenumber of ideas tested and to interactingmeaningfully with the external world. A raft ofproof of concepts (PoCs) and prototypes,largely in the US and Western Europe, rapidlymaterialised. But behind the scenes was agreater story … a deep-rooted relationshipbeing created between the world ofinnovators which is key to Euler Hermes'platform for innovation.
From EHDA to Euler HermesOne on hand, the EHDA platform forinnovation provides several services whichare relatively standard in corporate innovationlabs and start-up studios. These includedeciphering market trends and technologyshifts, connecting with innovator networks,ideating and validating ideas through PoCsand prototypes, and being digital culture
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Getting innovatorsinterested in thatecosystem was notenough in itself — EHDAalso had to interest thebroader Euler Hermesemployee base in theworld of innovators.
ambassadors across the Euler Hermes overall.What is less common, especially in
regulated industries, is the level of autonomythat Euler Hermes management gave EHDAfrom the outset. This freedom has been key indriving innovation throughout the company.It has enabled everyone to speak a commonlanguage, uniting the worlds of innovatorsand trade credit while working at aninnovator’s pace.
Building on this platform, scalability wascreated through a de-centralised, yetcohesive, network of internal and externalinnovators. EHDA acts as a connectormatching tech solutions to client needs,bringing its trusted internal and external
network together to solve problems andmaximise resources. A typical EHDA initiativewill mobilise an external partner start-up, adata lab, a couple of developers and aninternal business owner over a few shortweeks. Accelerating this cycle of ideating,assembling, testing and disbanding createsscalability for Euler Hermes. In explorationphases such as this, velocity is important:large corporates can often be tempted torevert to the deceptive security of moretraditional and structured approaches.
Increasingly, EHDA is becoming a ‘newbusiness factory’. Ultimately, the objective isto create and test products that supportEuler Hermes customers. Although at thebeginning of this journey, the ability to bringproducts to market and scale them up as amini-business unit brings significant potentialfor the business. As a result, hundreds ofexternal innovators are now simultaneouslyengaged on a wide range of initiatives,connected with hundreds of colleagueswithin Euler Hermes and the wider tradefinance industry. This is the central ingredientof the EHDA platform – a rich dynamic cycleof open innovation – creating and building
positive porosity in trade credit.
Powering the future of tradeThe Euler Hermes platform for innovationtransforms connections and ideas intotangible business that benefits the widertrade finance industry in several ways. Theporosity between trade finance andinnovation ecosystems fosters deeperexchanges and a more forward-lookingunderstanding of client needs. This in turnleads to the creation of fundamentally bettertrade services. Better trade services areclearly beneficial for the overall economy aswell as the trade finance industry, despitesome change being potentially disruptive tocurrent offerings. For instance, despite awidespread need for risk protection, less than5% of receivables are currently insured;better, more accessible trade credit serviceswill unlock the potential of a huge market.The same is true for receivables financing andother trade finance services.
EHDA is also a significant new businesslead generator. The innovation – andtechnology-first approach deepens client andpartner relationships, increasing both trustand mutually beneficial deals. In addition,bringing together the best trade financeexperts and leading external innovatorscreates a unique perspective on futuredevelopments. With EHDA’s New BusinessFactory, Euler Hermes is actively buildingtechnologies and services that will power thefuture of trade.
What next?At Euler Hermes, the creation of EHDA andthe acceleration of the group’s digitaltransformation has been a rapid and intensejourney. A large number of opportunitieshave already been unlocked. The platform forinnovation is a significant achievement whichwill continue to open many moreopportunities for the business and the widerindustry. However, the journey has just begunand the path is paved with new challenges.Sustaining a high level of innovation over thelong term is not easy, particularly on a globalscale. In adjusting the design of EHDA’splatform to achieve equal innovation at globaland local levels, we must also continue toattract top innovators to our ecosystem andbring in tangible new business. Trade financeis undoubtedly a fascinating ecosystem, witha virtually unlimited potential. We have onlyjust begun to scratch the surface of whatmay ultimately be possible. �
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... despite a widespread need for riskprotection, less than 5% of receivablesare currently insured; better, moreaccessible trade credit services willunlock the potential of a huge market.The same is true for receivables financingand other trade finance services.
In its 60-year journey, ECGC has had torespond to numerous impactful economicand geopolitical challenges. During the 1960sand 1970s, payment issues from nascentAfrican economies like Nigeria, Tanzania,Uganda and Sudan exposed exporters tohigher risks. ECGC rose to the challenge withlarge claim settlements. As new marketsopened up worldwide including opportunitiesfor Medium and Long Term exports, ECGC’srole became even more critical and ECGCresponded by issuing specific policy coversfor MLT exports in the 1980s. The 1990s weretesting times for ECGC with the devastatingIraq-Iran and the Iraq-Kuwait wars whichresulted in ECGC making claim settlements ofover USD 125 million. ECGC had to resort tomarket borrowings to meet these claimcommitments. That borrowings were fullyrepaid in the next few years through surplus,reflecting the strength and prudentunderwriting process followed by ECGC. Thefollowing decade brought a fresh wave ofeconomic and political turmoil. The USsubprime crisis, the Greek debt crisis, politicalstrife in Egypt, Tunisia and Libya – all posednew and unknown hazards to exporters.ECGC continued to enable exporters to copewith unexpected risks. Additional continuingreforms within India brought fresh challenges.ECGC is registered as a non-life insurancecompany with the Indian insurance regulator.All ECGC schemes comply with insuranceregulation, particularly in terms of pricing, riskmanagement, etc.
Over the years, ECGC has enhanced itsfootprint, growing in size, reach and inbusiness coverage. The total business coveredhas increased from USD 11.47 million inFinancial Year 1966 to USD 40,757 million in Financial Year 2017, which is close to 16% ofIndian exports.
Product innovationand diverse offeringsare ECGC's forte.There are 19 productsfor exporters, 11products for banksunder short termbusiness, and a dozenproducts for MLTbusiness (mediumand long term). In all
20,000 exporters, of which over 17000 areSMEs, are supported directly and indirectlythrough various products.
ECGC is a pioneer in providing protectionfor Trade Finance including working capitalfacilities since 1962, which encompassescover for facilities extended by banks to theexporters. Under this mandate ECGC servicesmore than 4,000 bank branches of 40 banks.During the Financial Year 2017, ECGC insuredUSD 18,076 million export credit outstandingof over 23,500 accounts of banks.
ECGC also covers trade receivables of theexporters through 12,000 policies of whichmore than 90% have been issued to SMEs.ECGC has taken several initiatives to helpIndian exporters to increase their trade withrest of the world. In the year 2005, ECGCbrought an across the board reduction inpremium by 33%. It was followed by across theboard reduction in premium rates by anaverage of 10% in 2007. To cater to thegrowing and specific requirements of theexporters, ECGC not only diversified its policyproduct portfolio, it also introducedcustomized covers for it clients. ECGC reducedpremium by an average of 17% in its WholeTurnover Policies in April 2016 to enable a levelplaying field for our exporter customers. Theexporter clients now pay only 50% of thepremium that they were paying 12 years ago
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Marking 60 years of successECGC Limited, a government-owned export credit agency establishedin 1957, aims to promote exports from India by providing cost effectivecredit insurance and support to trade finance. By Geetha Muralidhar,Chairman and Managing Director, Export Credit Guarantee Corporationof India (ECGC).
Geetha Muralidhar
for the same unit of risk.ECGC maintains data on more than
400,000 overseas buyers updated at regularintervals. ECGC has digitized the buyer'sreport which has not only reduced thehandling of files, but also brought speedydecisions and ultimately serve exportersbetter by reducing turnaround time. In theFinancial year 2017, exposure of over USD19,231 million was underwritten in respect ofmore than 120,000 buyers.
ECGC follows a seven-fold countryclassification. Review of the countries iscarried out dynamically by ECGC through itsin-house Country Risk Rating Model (CRRM)which measures the ability and likelihood of acountry to honour its commitmentsundertaken both as part of trade or sovereigndebt. ECGC covers are available for 237countries around the world.
Over the last 60 years ECGC hasdeveloped a network of 60 branch offices andfive regional offices in India that enables us toreach out to every exporter across the lengthand breadth of the country. ECGC has set upregional Claims Processing Centres at its fiveregional offices for speedy decision makingon claims. For customers’ convenience, claimprocedures have been simplified.
In the past five years, ECGC received acapital contribution of USD 70 million fromthe Government of India. Over the sameperiod, it returned USD 153 million in taxesand dividends.
In the international arena, ECGC is an
active member of the Berne Union. As part ofits initiatives, BU forms Working Groupsinvolving Berne Union Export Credit Agencies(ECAs) and leading external organizations.ECGC is a member of two such WorkingGroups involving Berne Union- World Bankand ICC Export Finance. ECGC has also beenvery closely associated with many othergroups associated directly or indirectly withthe Berne Union – Berne Union/World BankWorking Group, BU Regional Co-operationGroup meetings, G12 Heads of ECA’s, G-20ECA members, International Working Groupon Export Credits (IWG), and BRICS ECA’sForums and Meetings.
Over the years, ECGC has also been a hostto various international events such as theBerne Union Annual General Meeting,workshop of Berne Union Regional Co-operation group, etc. It hosted and chaired theG-12 Heads of ECAs meeting and BRICS ECAmeeting and technical workshops in 2016-17.
In its diamond jubilee year, ECGC has beenconferred the “Best ECA Award” by the Tradeand Forfaiting Review, which is a fitting andhappy coincidence for India's highly regardedexport credit agency.
ECGC thus is one of the rare ECAs that areregulated by insurance regulator, functioningcommercially while ensuring its mandate ofexport promotion by being an all-weatherpartner to exporters and banks in India.ECGC is poised to support increasinginternationalization of India’s trade in theyears to come. �
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IntroductionIn various studies of the World Bank andother development finance institutions (DFIs1)it is highlighted that the financing needs ofdeveloping countries to meet the UNSustainable Development goals (UN SDGs)are enormous. These SDGs cover a broadrange of development topics among whichinfrastructure, climate change, povertyreduction, education and health. UNCTADestimates that the UN SDGs require anadditional investment of $2.5 trillion a yearover the next 15 years (see Figure 1).
The international aid community broadlyrecognizes there is a huge financing gapbetween the UN SDG financing needs andthe financing that is available fromdeveloping countries’ own resources andfunds from bilateral aid donors and DFIs. Thisimplies that mobilization of non-developmental sources of capital – bothpublic and private – is of utmost importance.In their joint report “from billions to trillions”,published in April 2015, leading DFIs amongwhich the World Bank Group, ADB, EIB,EBRD, IaDB, AfDB and the IMF state that “tomeet the investment needs of the SDGs, theglobal community needs to move thediscussion from “Billions” in ODA to “Trillions”in investments of all kinds: public and private,national and global, in both capital andcapacity”.
It is also recognized by leading DFIs thatthe SDG agenda and their efforts to mobilizenon-developmental sources of capital require“not only just more money”, but also “a globalchange of mindsets, approaches andaccountabilities”. In other words afundamental redesign of the aid architecture
is needed. A substantial part
of the UN SDGfinancing gap iscaused by the lack ofbankable projects.This means that moreefforts have to be putinto projectdevelopment. Aninteresting initiative of
the DFI community is SOURCE, which is apublic project management tool enablinggovernment and public sector agencies toimprove their project preparation activities.2
The role of the OECD DACIn light of these developments the OECDDevelopment Assistance Committee (DAC),which is the most important internationalforum dealing with the international aidarchitecture, has made some importantchanges that have an impact on the
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The complementary role ofofficial developmentfinance: some observationsand recommendationsBy Paul H.J. Mudde, Consultant of Sustainable Finance & Insurance
Paul Mudde
Figure 1: Estimated annual investment needs & UN SDGFinancing Gap in U$ trillion
development finance community and otherproviders of finance for developing countries.The main topic in the OECD DAC concernsOfficial Development Assistance (ODA),which is basically a soft or concessional formof development finance. The internationaldonor community has committed to allocate0.7% of their Gross National Income (GNI) toODA for developing countries, which explainsthe importance of ODA. ODA consists ofbilateral ODA from donor countries to aidrecipient countries and contributions fromODA donor countries to multilateraldevelopment finance institutions. A grant tofor example IDA is recognised as ODA.Disbursements under bilateral aid loans witha minimum concessionality or grant level of25% can also be reported as ODA.Repayments of these loans are treated asnegative ODA. This is why the current ODAframework recognises gross and net ODA.
According to preliminary OECD DACstatistics the net ODA disbursements of allDAC members were in 2016 approximately$170 billion, of which $128.6 billion concerned bilateral ODA and $41.6 billionfinancial contributions to multilateralinstitutions.
Current ODA definition
The DAC defines ODA as “those flows to (1)countries and territories on the DAC List ofODA Recipients and to (2) multilateralinstitutions which are:i. provided by official agencies, including
state and local governments, or by theirexecutive agencies; and
ii. each transaction of which:a) is administered with the promotion of
the economic development andwelfare of developing countries as itsmain objective; and
b) is concessional in character andconveys a grant element of at least 25per cent (calculated at a rate ofdiscount of 10 per cent).”
Source: OECD DAC
In 2014 the OECD DAC agreed to implementa new methodology to measure theminimum concessionality level for OfficialDevelopment Assistance (ODA). Withconcessionality calculations the OECD DACdonor countries measure in essence theamount of subsidy provided by a donor todistinguish ODA from other forms of(official) financing (see Figure 2).
Development of a new ODAframeworkIn the current OECD DAC system to measureconcessionality a grant leads to aconcessionality level of 100%, whereas acommercial bank loan (without any officialsubsidies) leads to a concessionality level of0%. According to the current ODA definitionthe minimum concessionality level for a loanto qualify as ODA is 25%, but for many yearsa fixed – highly doubtful – discount rate of10% has been used, irrespective the tenor ofthe loan, the relevant currency and marketinterest rates of the financing. Today marketdiscount rates are substantially lower thanthe fixed 10% of the OECD DAC. In thecontext of OECD tied aid regulations in theOECD Arrangement for officially supportedexport credits (which is governed by adifferent OECD forum than the DAC) morerealistic discount rates are used. They arecurrency specific; take into account marketinterest rates for sovereign borrowers and thetenor of the loan. Today’s discount rates fortied aid credits with a tenor between 15 and20 years are for the Euro 1.7% and for the$3.7%3. They are therefore substantially lowerthan the 10% discount rate for ODA. Formany years it has been quite easy for manydonors to lend at or slightly above their ownlong-term sovereign bond rates, while stillmeeting the 25% ODA concessionalitythreshold. The artificial high ODA discountrate led therefore to a highly inflated ODAperformance of donor countries during thepast decade. This was an important motivefor the DAC to redefine ODA.
At the end of December 2014 OECD DACmembers agreed to count only as ODA
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Figure 2: Net ODA disbursements in million U$ (at currentprices)
development grants and for developmentloans only the “grant portion” of the loan.This “grant portion” is in essence the aidsubsidy involved and is calculated on thebasis of new specific ODA discount rates.These new discount rates are nowdifferentiated in three country categories,namely 9% for Least Developed Countries(LDCs) and Low Income Countries (LICs), 7%for Lower Middle Income Countries (LMICs)and 6% for Upper Middle Income Countries(UMICs). Unfortunately the new ODAdiscount rates are again not an accuratereflection of market interest rates and stillmuch higher than the more realistic discountrates for tied aid credits. It implies that ODAwill remain highly inflated in the future.
Interesting is that the IMF and World Bankapply a fixed 5%4 discount rate to measureminimum concessionality levels for loans tocountries that fall under the IMF / WorldBank Debt Sustainability Framework(IMF/WB DSF). The DSF was developed toavoid unsustainable borrowing by developingcountries. It applies to all Low IncomeCountries (LICs) of which many in the pasttwo decades benefitted from debt relief.
As a consequence of these recent changesthere are currently three differentmethodologies for concessionalitycalculations for aid loans of which the one forODA is the least realistic. This is likelyinfluenced by the desire of DAC membercountries to meet the 0.7% ODA/GNIcommitment.
In addition the OECD DAC agreed in 2014to new minimum concessionality levels, whichfurther complicate the ODA framework. ForLower Middle Income Countries (LMIC) theminimum concessionality level is set at 15%and for Upper Middle Income Countries(UMIC) it is 10%. This implies that for aid loansto these countries less aid subsidies arerequired than under the old ODA framework.Furthermore the concessionality level for the
Least Developed Countries (LDC) and otherLow Income Countries (LIC) have beenincreased from 25% to 45%, which impliesthat for these countries aid loans require ahigher amount of subsidy to qualify as ODA.Important is that these new ODA rules arenot only relevant for bilateral ODA loans, butalso for the concessional lending activities ofmultilateral donors such as IDA and theregional development banks. Forconcessional loans of MultilateralDevelopment Banks (MDBs) have to meet theapplicable ODA minimum concessionalitylevels.
The rationale of the ODA changes ofminimum concessionality levels is toencourage donors to provide more ODA tocountries that are highly dependent on aidand less ODA to countries that havereasonable access to alternative sources offinance. But the unintended side effect couldvery well be that ODA loans to LMICs andUMICs will increase, because donors requiresubstantial less aid subsidies for aid loans tothese countries. The new concessionalityrules could therefore be completelycounterproductive. Additional measures areneeded to avoid a misallocation of ODA (seeTable 1).
In the IMF/ WB DSF, which applies to LICs,the minimum concessionality level is 35%,while for tied aid credits the minimumconcessionality levels are 50% for LDCs and35% for all other countries. It is unclear whythe DAC has opted for its own minimumconcessionalty requirements. Fact is that thenew ODA minimum concessionality levels anddiscount rates have complicated theinternational aid architecture.
Currently the OECD DAC is discussing howODA can be used to encourage mobilizationof private sector sources of capital. Thisconcerns a discussion on Private SectorInstruments (PSI), which includes loans,guarantees and equity investments. The focus
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Table 1: Aid architecture and concessionality calculations
Old IMF / ODA New ODA WB DSF Tied Aid 4
Grant Element 25% • 45% for LDCs and other LICs 35% • 50% for LDCsThresholds • 15% for LMICs • 35% for all other
• 10% for UMICs countries
Discount Rates 10% • 9% for LDCs and other LICs 5% • Euro: 1.7% (1)• 7% for LMICs • U$: 3.7% (1)• 6% for UMICs
(1) These interest rates are according to the OECD arrangement on officially supported export credits theapplicable discount rates for tied aid credits with a tenor between 15 and 20 years in March 2017.
of the current discussion is to determine theso-called ODA component (i.e. aid subsidy)of these PSI-instruments. Very arbitrarycalculation methodologies are suggested todistract the ODA subsidy from these financialinstruments. This ODA component can thenbe reported as ODA, which will likely imply anincrease of the ODA performance of donors.The intention of the OECD DAC is to seekfirst an agreement on these ODA aid subsidycalculations and at a latter stage a discussionwill take place on the complementary role ofODA. One of the problems is that againunrealistic discount rates are used tocalculate the ODA component of the PSI–instruments, which has also an impact onothers forms of official finance.
A challenge in all these OECD DACdiscussions is that the entire new ODAframework is discussed in complete isolationwithout properly taking into account marketrealities and the potential negative impact ofnew regulations on alternative (non-ODA)sources of capital that are available todeveloping countries. Instead of crowding innon-developmental sources of capital ODAmay crowd out these alternative sources.Clarity about the complementary role of not
only ODA, but also other forms of officiallysupported development financing, istherefore of utmost importance. It is in theinterest of the donor community and the SDGagenda at large to use scarce subsidized aidfinancing only for projects in countries thatdo not have adequate access to financingthat requires no or less official support. Thehigher the aid subsidies involved the moreprudency is needed to avoid crowding out.
In other words a clear understanding onthe complementary role of developmentfinance is critical and urgently needed toenhance aid efficiency and aid effectivenessand achieve the UN SDGs.
ODA and other sources of financeavailable for developing countriesCountries make use of various sources offinance. These sources include market baseddebt finance from domestic and internationalbank and capital markets (without any formof official support), ODA and Other OfficialFlows (OOF). OOF, which is also reported tothe OECD, concerns official (governmentsupported) financing, which does not meetthe ODA conditions, either because it is notprimarily aimed at development of
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The role of official Export Credit Agencies (ECAs).
ECAs exist in many OECD and non-OECD countries. Their main objective is to supportexports and foreign investments from their home country. Leading ECAs are member of theso-called Berne Union, which is a global association of credit and political risk insurers.Berne Union members supported in 2016 11.1% of global exports. At the end of 2016 the totalMLT exposure of Berne Union members in both export credits and investments was approx.U$ 961 billion. This amount is more than 200% of the outstanding exposure of leading DFIson developing countries, which in 2016 stood at approximately U$ 419 billion.
Outstanding exposure of leading MDBs in 2016 (in million U$)
Loans Equity Guarantees Total
IBRD/IDA 167.643 0 5.198 172.841
IFC 23.910 10.793 3.478 38.181
ADB 67.599 1.187 2.105 70.891
IaDB 81.952 0 230 82.182
AfDB 21.641 104 565 22.310
EBRD 26.213 5.949 638 32.800
Total 388.958 18.033 12.214 419.205
Obviously the mandates of ECAs and DFI’s differ. DFI’s have a developmental mandate,whereas ECAs have primarily an export promotion mandate. It is, however, a fact that bothDFIs and ECAs have an important developmental impact, for they are both key in financingthe import and investment needs of developing countries.
Source: Berne Union and MDB annual reports 2016.
developing countries or because it has aconcessionality level of less than 25%. OOFincludes officially supported export credits ofofficial Export Credit Agencies (ECAs) andloans from bilateral DFIs that providefinancing on non-concessional terms, eitherat preferential interest rates (but too high toqualify as ODA) or on market based terms.Other examples of OOF are officialinvestment loans5 of EXIM banks and ECAsthat are in particular used in project finance,private sector market based lending ofbilateral DFIs (e.g. loans from FMO, DEG,Proparco) and so-called bilateral“promotional loans6” to sovereign borrowers,whereby the bilateral DFI passes on thebenefits of its low funding costs to the loanto the sovereign. The German developmentbank KfW is quite active in this area ofpromotional sovereign loans.
Developing countries borrow alsosubstantial amounts from MultilateralDevelopment Banks (MDBs). Such financingprovided by entities like the IBRD/IDA isreported to the OECD under “multilateralconcessional lending” (which is the ODAequivalent for MDBs) or “multilateral non-concessional lending” (which is the OOFequivalent for MDBs). (See Figure 3.)
Non-concessional loans of MDBs includemarket-based loans to private sectorborrowers. Examples are private sector loansprovided by IFC and the private lendingdepartments of ADB, EBRD, IaDB and AfDBand sovereign loans to the public sector atpreferential subsidized interest rates. Thelatter concerns loans whereby the MDBpasses on the benefits of its low fundingcosts (based upon its AAA credit rating andpreferred creditor status) to the loans fortheir sovereign borrowers. These sovereignpreferential loans are under the current ODA
regime not concessional7, but benefit from asubstantial subsidy. The interest rates are notmarket based. Although each MDB applies itsown pricing system and pricing differs amongMDBs, the interest rates of individual MDBsare for all their sovereign borrowers the same,irrespective their credit standing. An IBRDloan to a country like China, Mexico, Brazil,Turkey or India has for example the sameinterest rate as an IBRD loan to a high riskcountry in Africa (see Table 2).
In the OECD DAC discussions on the ODAcomponent of PSI instruments the DAC is infact looking at the “ODA aid subsidy” in OOFfinancing statistics. Would it not be easier fordonors to partially reallocate ODA funds toOOF financing instruments? Most OECD DACdonors are apparently not in favor of thatbecause this would likely negatively affecttheir international commitment to spend 0.7%of GNI on ODA (see Figure 4).
Figure 4 summarizes all main forms ofofficial financing available to developingcountries. It provides also indications of the‘”level of official support” for each financingmodality. Obviously an “ODA grant”constitutes the highest form of official
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Table 2: Indicative non-concessional U$ lending interest rates of MDBs for sovereign loanswith an average maturity of 15 years (Sept 2017)
IBRD ADB IaDB AfDB
Floating Base Rate for U$ 6 month Libor 6 month Libor 3 month Libor 6 month Libor
Base rate 50 Bps 50 Bps 85 Bps 80 Bps
Maturity premium 30 Bps 20 Bps Not Applicable 10 Bps
support and “market based finance”, such asa commercial bank loan, involves no officialsupport. Between “market based finance”and “ODA grants” there are various forms ofofficial finance, with different levels of officialsupport. Official non-development financeconcerns (1) OECD ECA exports and (2)OECD ECA investment loans. The otherforms of official finance concerns OfficialDevelopment Finance (ODF), which is thesum of ODA + OOF provided by DFIs.
How to avoid crowding out of marketbased finance or other sources of official financeGiven the enormous financing needs ofdeveloping countries mobilization of privatecapital is high on the agenda of theinternational aid community. This implies thatthe DFIs and their guardian authorities needto be fully aware of which other sources offinance are (potentially) available todeveloping countries and how these othersources can be tapped.
There is tendency within the aidcommunity to narrow the discussions on themobilization of private capital to thedevelopment of public private partnerships(PPPs), in particular through project finance.The latter concerns projects that have thepotential to generate sufficient income torepay commercial debt financing and paydividend to equity investors. The too narrowapproach ignores amongst others thatprivate capital can not only be mobilized forprivate sector sponsored PPP projects, butalso for typical public sector projects,whereby the government (sovereign) or asub sovereign entity (e.g. municipality) orstate owned enterprise (SOE) acts asborrower or guarantor. This is for examplerelevant for most transport, electricitydistribution, climate adaptation and waterprojects. Most roads, railways, regionalairports, harbours, drinking water & sanitationprojects are and will likely remain typicalpublic sector projects in many developingcountries8.
In India, which is the most advanced inprivate sector participation in infrastructure,64% of the country’s infrastructure is stillfinanced and managed by the public sector.In most other developing countries the shareof public sector infrastructure is likelysubstantially higher. PPP can contribute tobridging the infrastructure financing gap, butis clearly not the panacea. DFIs’ mobilizationstrategies should therefore also focus on
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Figure 4: Indicative non-concessional U$ lending interestrates of MDBs for sovereign loans with an average maturityof 15 years (Sept 2017)
mobilizing capital for public sector projects.This is currently hardly discussed in the DFIcommunity, whereas the opportunities for themobilization of capital for public sectorprojects are substantial. Many governments indeveloping countries – in particular middle-income countries – have good or reasonableaccess to the private market and can obtainfinancing (support) from for example officialExport Credit Agencies, commercial banksand private insurers. This concerns inparticular countries that are rated in OECDECA risk categories 2 – 4, but opportunitiesalso exist in countries with a higher riskprofile9. The impressive overlap of exposuresof for example IBRD/IDA and Berne Unionmembers on many countries show there arehuge opportunities for cooperation andalignment of operations. More or less similaroverlaps exist with the portfolios of otherMultilateral Development Banks (e.g. ADB,IaDB, EBRD, EIB, AfDB). Enhancedcooperation through among othersguarantee and risk transfer operations shouldbe explored and utilized to mobilize morefinancing for development and to improve aidefficiency and aid effectiveness (see Figures5 and 6).
The aid community focuses on mobilizingprivate capital, but this ignores thatimportant public – non-developmental– sources of capital can be catalyzed fordeveloping countries, This concerns amongothers insurance capacity of official exportcredit agencies and lending capacity of EXIMbanks and investment capital from sovereignwealth funds. These three public sources havesubstantial capital available to support SDGprojects in developing countries. That’s why(governments through their) multilateral andbilateral DFIs should include these potentialsources in their mobilization strategies.
DFI mobilization strategies require not onlyclarity on which public or private funds canbe crowded in, but also a clear view on howpotential “crowding out” of other forms offinance without or with substantial lessofficial support, can be avoided. In otherwords: clarity about the complementary roleof official finance. In this area the OECD DAChas thus far made little progress. There is theintention to discuss “additionality” in the nearfuture, but this is limited to ODA PSI-instruments. The upcoming DAC discussionshould also include additionality of non-ODAforms of official development finance anddevelopment finance for public sectorborrowers.
Participants to the OECD Arrangement onofficially supported export credits have madesome important regulations on this topic.They have amongst others defined minimumpremiums to avoid distortion of competitionbetween various ECAs that are caused bypricing differences. Furthermore the ruleshave been set to avoid a credit subsidy racebetween OECD governments, becauseultimately the ECA export promotionschemes involve scarce governmentsbudgets and tax payers’ money. Theseconsiderations are obviously also relevant forother forms of official finance, includingdevelopment finance.
The minimum OECD ECA risk premiumsare based upon a joint risk assessment by allOECD ECAs of the financial, economic andpolitical situation of countries. In the designof the minimum premiums market basedpricing benchmarks were also taken intoaccount. The system is furthermore fed bythe joint payment experiences of OECD ECAswith developing countries. These minimumpremium rules have been highly effective toavoid pricing distortion of competition in theexport finance business between OECDECAs.10
The minimum OECD premium rules do notapply to bilateral investment loans providedby EXIM banks or supported by investmentguarantees from ECA-insurers, because theseloans or guarantees are not tied to exportsbut tied to the nationality of the (equity)investor. Reliable data on ECA pricingpractices for these investment loans orinvestment guarantees are unfortunately notavailable. There are, however, indications thatthese untied investment loans are crowdingout official export credits. During the past 6-8years the volume of untied investment loansand guarantees have substantially increased11.They are mainly used for debt financing ofgreenfield project finance transactions inwhich foreign equity investors are involved.This concerns the largest share of PublicPrivate Partnership projects.
The problem of crowding out of officialexport credits by these official investmentloans / guarantees could be avoided if forthese EXIM / ECA investment loans theOECD minimum premiums would apply. Forthe ECAs involved this should technically notbe a problem, because they are alreadyfamiliar with the OECD pricing system andthe risks to which they are exposed undertheir investment programs are very similar tothe risks under their export credit programs.
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Multilateral or bilateral DFI investmentloans for private sector borrowers are usuallyprovided on market based terms, but unlikethe ECAs, DFIs do not have a system ofminimum risk based premiums. In this areaDFIs compete with market financiers(without official support) and ECA supportedloans and even among each other. “Unfaircompetition” caused by different pricingpractices could be avoided if the DFIs wouldimplement the OECD minimum premiums fortrade related foreign currency denominatedexport or import financing12. It wouldtherefore not apply to general DFI credit lines
to local banks to encourage them to lend tocertain parts of the economy in developingcountries. (e.g. climate friendly investments,SME sector, microfinance). For many privatesector oriented DFIs this credit line businessconcerns approximately 25% of their totallending to the private sector. Minimumpremiums for trade related business wouldreduce the risk of private sector DFI loanscrowding out other sources of finance thatrequire no or less official support. For privatesector oriented DFIs implementation of theOECD minimum premiums should alsotechnically not be a problem, because they
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Table 3: The complementary role of different forms of official finance
currently apply market-based rates. Ifneeded, they can, like ECAs and EXIM banks,charge higher rates. The advantage of theOECD ECA minimum premiums is also that itwill reduce pricing competition among DFIs.An issue is likely that most DFIs are notfamiliar wit the OECD minimum premiumrates and do not like to be bound by (new)rules. On the other hand the OECD exportcredit rules are formally already applicable tobilateral DFIs if and when they support anexport transaction from their home country. Itmay be the case that bilateral DFIs are notfully aware of the potential relevance ofexport credit regulations. It is thereforerecommended that ECAs and DFIs worktogether to compare their pricing practicesand experiences.
Promotional loans of bilateral DFIs andnon-concessional preferential loans fromMDBs, which in general are only provided tosovereign borrowers, have a larger subsidycomponent than the DFI private sector loansor ECA supported export credits. They maytherefore potentially not only crowd ourmarket based financing, but also these twoother officially supported sources of finance.To avoid this from happening relevant DFIsand MDBs should check whether their morefavourable financing terms are indeedrequired. It is also in the interest of bilateralDFIs and MDBs to harmonise their pricingpractices for these preferential / promotionalloans, because today they differ quitesubstantially from one another, resulting inpricing competition among the variousproviders of “promotional” developmentloans.
Bilateral ODA loans and concessional MDBloans have even a greater risk of crowdingout other forms of finance for these loansinvolve a substantial higher aid subsidy. Thesefunds should therefore only be used as“finance in last resort”, when other sources offinance are not (adequately) available. In thisway it can also be ensured that ODA is mainlyprovided to the least developed countriesand low-income countries, which currently fallunder the IMF / WB DSF.
This complementarity ranking could helpofficial financiers, in particular bilateral andmultilateral development financiers, toallocate their subsidized developmentfinancing only for those (parts of) projectsand countries that truly require subsidizeddevelopment financing. The suggestedadditionality check will contribute to aidefficiency and aid effectiveness and
achievement of the UN SDGs.An interesting additional tool that can be
introduced to check potential distortionbetween (highly) subsidized developmentfinance and market based finance or ECAexport credits or market based DFI loanscould be the so-called “commercial viabilitytest” that has been developed for tied aidcredits13. This test ensures that non-marketbased tied aid finance operatescomplementary to the market. A similarcommercial viability test could be introducedfor non-market based untied developmentfinance. In this way it can be avoided thatscarce non-market based funds areunintentionally crowding out private capitalor public capital that involves less officialsupport. The OECD DAC could benefit fromthe extensive “body of experience” of OECDexport credit Participants with theirdiscussions about tied aid eligibility.
A commercial viability test for non-marketbased untied aid will also contribute to definemore precisely the complementary role ofnon-market based DFI finance (includingODA) and enhance the developmentalimpact of DFI operations. This is obviously ofgreat importance to developing countriesand the global SDG agenda.
ConclusionsEnormous amounts of financing are neededto achieve the UN SDGS, which implies that astrong alignment of development financewith other forms of finance is critical.Mobilization of non-developmental sources ofcapital is important to achieve the UN SDGS.The discussion should not be limited tomobilizing private capital. There areimportant non-developmental sources ofpublic capital that can be catalyzed. Non-developmental sources of capital cannot onlybe catalyzed for private sector projects, butalso for public sector projects. A focus on“crowding in” other sources of capitalrequires a different mindset, incentives andbusiness approaches of DFIs. Of equalimportance is the question how “crowdingout” of market based finance without supportor official finance with substantial less officialsupport can be avoided.
It is therefore very important that theOECD DAC starts with a fundamentaldiscussion on the complementary role ofODA and other forms of developmentfinance, both for the financing of public andprivate sector projects. For that purpose theOECD DAC should invite non-development
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financiers to the table. In this way it can beavoided that new ODA regulations will bedeveloped that negatively affect private orother official (financial) flows to developingcountries. Clarity on the complementary roleof development finance is also critical toimprove aid efficiency and aid effectiveness.
OECD members should therefore seriouslyconsider applying the OECD ECA minimumpremiums to:
(1) untied investment loans of EXIM banksand /or untied investment guarantees fordebt financing of ECA insurers.
(2) Investment loans or guarantees fordebt financing from both multilateral andbilateral DFIs for private sector projects.
Furthermore a commercial viability testcould be introduced for non-market baseddevelopment finance with relatively highsubsidy levels. This could be used to assessthe need for sovereign “promotional loans”and concessional loans. Concessional loansshould preferably only be provided to
countries that have no or limited access tomarket based finance or official finance thatrequires less official support. This includesamongst others the IMF/ WB DSF countries.
These suggestions could assist OECD DACmembers and MDBs to enhance lending tothose countries that really need ODA or otherforms of officially supported developmentloans and improve the effectiveness andefficiency of their development financeactivities.
ODA can be used for project developmentto increase the number of bankable projects.In this way ODA can contribute veryeffectively to the achievement of the UNSDGs.
Last, but not least: the OECD export creditand DAC member countries and theinternational DFI community should reach anunderstanding with non-OECD countries on
both export credit and development finance(tied and untied aid) topics. For some non-OECD countries have become importantofficial financiers of the SDG needs ofdeveloping countries. These non-OECDcountries are currently not bound byinternational export credit and aidregulations. OECD and non-OECD providersof official finance and MultilateralDevelopment Banks should therefore workclosely together on additionality of officialfinance. A global understanding on thecomplementary role of official finance iscritical for the achievement of the UN SDGSs. �
Notes1 There are multilateral and bilateral DFIs. The most
well known multilateral DFIs are IBRD/IDA, IFCMIGA, ADB, IaDB, AfDB, EBRD, IDB and EIB.Recently two new multilateral DFIs wereestablished, namely the AIIB and NDB. Examples ofbilateral DFIs are public sector development banks/ agencies such as KfW (Germany) and AfD(France) and private sector development bankssuch as OPIC (USA), DEG (Germany), Proparco(France) and FMO (The Netherlands).
2 SOURCE has been developed by the SustainableInfrastructure Foundation (SIF), which acts asexecuting agency for all participating developmentbanks among which ADB, AfDB, BNDES, DBSA,EBRD, IaDB and the World Bank group.
3 These are the so-called Differentiated DiscountRates (DDRs) that are published by the OECDExport credit secretariat. The DDRs vary bycurrency and tenor of the financing.
4 The IMF / WB adopted a 5% discount rate forsimplicity reasons.
5 Investment loans or investment guarantees fromEXIM banks and ECA-insurers are formally not tiedto exports from the ECA country, but tied to thenationality of the investor.
6 It is unknown whether these bilateral promotionalloans will qualify as ODA or OOF under the newODA regime. It all depends on the level ofconcessionality of these promotional loans.
7 It is unknown whether these preferential MDBsovereign loans will be reported as concessional ornon-concessional loans under the new ODAframework. It will depend on the concessionalitylevel of the MDB loans.
8 It is noteworthy that most PPP projects indeveloping countries concern electricity generation/ energy and telecom projects. See the PPIdatabase of the World Bank.
9 More information about the OECD country riskclassification can be found via the following link:http://www.oecd.org/trade/xcred/crc.htm
10 More information about the OECD minimumpremium for officially supported export credits canbe found on the following website of the OECD:http://www.oecd.org/tad/xcred/
11 Important providers of untied investment loans areamongst others JBIC (Japan), KEXIM (South Korea)and OPIC (The United States).
12 Due to the lack of reliable data on trade related DFIfinancing the volume of such DFI business activitiesis unknown.
13 See the OECD Arrangement on officially supportedexport credits. 28
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A global understanding onthe complementary role ofofficial finance is criticalfor the achievement of theUN SDGSs.
IntroductionExport Credit Agencies (“ECAs”) have longhad a public policy mandate. They introducedspecial arrangements1 promoting climatechange mitigation measures well before theParis accord on climate change.
This paper sets out the opportunity forECAs to refresh and expand their publicpolicy commitment by pro-activelysupporting a broader “sustainabledevelopment” agenda, extend beyondtraditional export finance segments and “stayrelevant” over the medium-long term as theworld transitions to a lower carbon economy.
The ICC Global Export Finance Committeewishes to engage in a discussion with ECAsin relation to this important topic.
What is “sustainable development”?“Sustainable development” is a broad term,but at its core it is development activityundertaken with a long term view.
Sustainable development came into globalfocus in September 2015 when all 193Member States of the United Nations“adopted a plan for achieving a better futurefor all — laying out a path over the next 15years to end extreme poverty, fight inequalityand injustice, and protect our planet. At theheart of “Agenda 2030” are the SustainableDevelopment Goals (SDGs) which clearlydefine the world we want — applying to allnations and leaving no one behind”2.
The SDGs address issues such as GoodHealth and Wellbeing, Quality Education,Clean Water and Sanitation, Affordable andClean Energy and Sustainable Cities andCommunities, and can be used as a referencefor a discussion regarding a broader role forECAs in supporting sustainable development.
Why should ECAs get involved?The reasons are compelling:
1. The need is acute and the ambitionssignificant – financing from multiple
sources will be required in order to deliverchange. For example, the funding gap tomeet the SDGs is estimated to be~USD2.6tr p.a. to 2030.3
2. ECAs have the skills and experience toplay a key role in sustainable development,particularly in emerging markets. It is anopportunity for the industry and itsparticipants to stay relevant in a changingworld. Yet in part at least, to date ECAsappear to be absent from this debate.4
3. 193 governments have signed up to theSDGs, so actions by ECAs promotingsustainable development will be consistentwith policy. Governments are, or soon willbe, obliged to report on what they aredoing to promote the SDGs.5 Likewise,governments have signed up to the ParisAccord on Climate Change and all but theUSA will be under pressure to meet their“Nationally Determined Commitments”.Action on climate change is consistent withSDGs 7 & 13.
4. Sustainable development and the SDGsare also a key concern of the privatesector. 82% of S&P 500 companiesproduced Corporate Sustainability Reportsin 2016 (up from only 20% in 2011)6,emphasising the development of thesustainable development agenda and theimportance of ESG issues when settingcorporate strategies. SDG17 is titled“Partnerships for the Goals”. Financingsustainable development in developingmarkets is often difficult. This is whereECAs excel and can lend real comfort to,and catalyse, the private sector.
5. Our mutual customers – and potential ECAborrowers – in emerging economies arealso embracing sustainable developmentand practices and increasingly wanting toengage in discussion on the topic ofsustainability. The ability of ECAs toconverse on this topic will becomeincreasingly important
6. ECAs are one of few “origination”30
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The case for ECAs’promotion of sustainabledevelopmentBy the ICC Global Export Finance Committee.
functions in government with thecommercial “edge” to promote bothprivate and public sector sustainabledevelopment.
7. ECAs are one of few areas of governmentwith the requisite expertise in developingmarkets to make a difference.
8. This is also a great branding exercise forECAs and a counter to critics of ECAactivity. The positive branding can extendto government more broadly. For example,loans provided in support of sustainabledevelopment will qualify for inclusion inthe burgeoning “Impact” or “Sustainability”bond markets, reflecting positively on thegovernment of ECA/s behind thetransactions.
9. Support of sustainable development willimpose a natural discipline encouragingboth ECAs and private sector partners totake a long term view on development.
Not all SDGs lend themselves to export-related activity, but most do. There are alsoinvestment-related, “national interest”opportunities, e.g.:
l Climate adaptation measures in developingcountries. E.g. construction of sea walls toprotect communities in low-lying areas(SDG 1, 13)
l Rural infrastructure, improving agriculturalproductivity (SDG 2)
l Healthcare (SDG 3)l Education (SDG 4)l Water (SDG 6)l Clean Energy (SDG 7)l Improving economic productivity,
employment & sustainable tourism [verybroad, so consider limiting to developingmarkets] (SDG 8)
l Build resilient infrastructure, fosterinnovation [very broad, so consider limitingto developing markets] (SDG 9)
l Promote income growth of the bottom40% of the population to reduce inequality(SDG 10)
l Affordable housing and transport (SDG 11)l Promote recycling & efficient use of natural
resources (SDG 12)l Promote sustainable use of marine
resources (SDG 14)l Promote sustainable use and protection of
forest and other ecosystems (SDG 15)l Partnerships for the Goals (SDG 17)
What are other market players doing?Sustainability considerations are rapidlybecoming a mainstream concern and SDG-
specific initiatives are gaining momentum inthe global economy. For example:l Over 9,000 companies have pledged to
make the SDGs a success.7 A 2017 surveyof large companies by research firmOekom revealed that less than two yearsafter the SDGs came in to effect, 17.4% ofcompanies surveyed were already aligningtheir sustainability management systemswith the SDGs.8
l Back in 2016, a coalition of Dutch andScandinavian pension investors – APG,PGGM, Swedish pension funds AP1, AP2,AP3 and AP4, MN, Actiam and KempenCapital Management – signed a pledge totarget investable solutions around theSDGs.9
l The UN Global Compact Action Platformfor Financial Innovation for the SDGsbrings together UN agencies, companies,banks, investors and development banks tocreate mainstream SDG investments,leverage new partnerships and blendedfinance, match SDG investments andinvestors and map financial innovation.
l Both ANZ and HSBC have launched SDGbonds, following the lead of the WorldBank in March 2017 and assisting inbringing this financial innovation in to themainstream.
l BNP Paribas is devising a methodology toascertain which SDGs benefit from theactivities of a particular company orcountry allowing investors “to map out theSDGs like an Atlas for the regions in whichthey invest”, and look for the companies inthat region that are prioritising the sameSDGs as them.
l The European Union released its “ActionPlan on Financing Sustainable Growth” on9 March 2018…..without mentioning ECAs.
While the above initiatives are largelyfocussed on the developed markets, a largenumber of companies including BASF,Deutsche Post, ENEL, Ikea, LG, Philips, SDS,Unilever, Vestas and Yara have or areconducting sustainable developmentinitiatives in developing markets, often withthe help of UN agencies. ECAs are ideallyplaced to help banks and corporates buildout their commercial, as opposed tocharitable, enterprises in developing markets.
Potential actions ECAs could take insupport of sustainable development:ECAs, individually and collectively, will decidewhat actions are necessary and to whatextent it is appropriate to anchor those
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“sustainability” actions in the SDGs. But tostart the discussion, here are somesuggestions:
Immediate actions:1. “Do no harm”: screen deals for alignment
with the SDG or other sustainabilityprinciples.
2. Extend current environmental policy andreview into pro-active engagement withborrowers and sponsors on the issue ofsustainability which could become asource of competitive advantage forcertain ECAs
3. Develop new sustainable developmentsupport solutions (as part of a nationalinterest agenda)
4. Map all transactions to the SDGs5. Have one or more ECAs join the UN Global
Compact Action Plan for FinancialInnovation for the SDGs – given itscommercial (as opposed to philanthropic)emphasis, the Compact could be an idealplatform for progressive ECAs to exploreopportunities to partner with the privatesector to promote sustainabledevelopment, particularly in developingcountries.
6. Simple re-branding of existing guaranteesand insurances
7. Reduce minimum deal-size thresholdswhen exports relate to sustainabledevelopment in developing countries,thereby catalysing innovation at home andsustainable development where it is mostneeded.
Medium term initiatives:1. Soften content requirements (e.g. by (i)
increasing the current 30% cap on localcosts (ii) enabling ECA support for projectswith multiple, but small export contracts)and promote services (noting thatprogression of the SDGs will requireprovision of developed world services inthe developing world)
senior debt and/or measures in “impact”terms: participating ECAs could team withthe private sector (charitable foundations,family offices etc) to catalyse investmentwith a joint – or alternate –economic/impact return. Climate initiativescould be linked to carbon reduction incountries where carbon trading isunavailable. Education initiatives could be
linked to improvements in literacy levels.Waste reduction could be linked to tonnesof landfill avoided. Many ECAs have “bond-friendly” products enabling ECAs to play arole in expanding the support of thecapital markets, mobilising part of the~US$300t10 managed by the capitalmarkets every year.
Finally this does not necessarily need to bean OECD-endorsed initiative. It may besomething ECAs consider progressingoutside that framework.
Next stepsWe invite interested ECAs to join a discussionwith ICC Global Export Finance Committee –Sustainability Working Group representatives(ANZ, HSBC, JP Morgan, MUFG) at the TXFevent in Prague, 6-7 June.
ICC Global Export FinanceCommitteeContacts for further information:
Supported Export Credits2 UN-Business Action Hub: See
https://business.un.org/en/info/sdg3 The World Economic Forum estimates that
approximately $4 trillion a year is needed to realisethe SDGs worldwide. Current annual investment inrelated projects lies at $1.4 trillion, meaning there isa $2.6 trillion pa investment gap.
4 Eg The European Union released its “Action Plan onFinancing Sustainable Growth” on 9 March 2018…..without mentioning ECAs.
5 As part of its follow-up and review mechanisms, the2030 Agenda for Sustainable Developmentencourages member states to “conduct regular andinclusive reviews of progress at the national andsub-national levels, which are country-led andcountry-driven” and reported to the UN. These“Voluntary National Reviews” also seek tostrengthen policies and institutions of governmentsand to mobilize multi-stakeholder support andpartnerships for the implementation of theSustainable Development Goals.
6 3BL Media, 31 May 2017 7 EY, 29 January 2018, How do you fund a sustainable
tomorrow?8 Environmental Finance 17 December 20179 Environmental Finance 17 December 201710 EY, 29 January 2018, How do you fund a sustainable
tomorrow?
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