United States: Export Credit Agencies And Political Risk Insurers In International Project Financing

Export Credit Agencies – General

An Export Credit Agency (commonly referred to as an ECA) is a national government-owned or affiliated entity that supports the export of domestic goods and services by providing financing to foreign purchasers of such goods and services. The fundamental purpose of an ECA is to increase the volume of exports from domestic producers of goods and services by opening overseas markets for such products through the provision of financing and other risk-reducing products. ECA-supported goods and services can range from large capital goods—such as aircraft, satellites or locomotives—to finished industrial products, such as solar panels, wind turbines, pumps and engines and even further to "soft" exports that can include legal, engineering, technical and other services. In a nutshell, ECAs support the expansion of foreign trade by their national exporters and service providers. In doing so, of course, they also support domestic employment.

ECAs have a long history that is intertwined with the expansion of economies and governmental policies to promote national exports. The first official ECA, the English Credit Guarantee Department (ECGD), was established in the United Kingdom in 1919. In Germany, the predecessor to the present ECA was established in 1917, and the Export– Import Bank of the United States was founded in 1934. In the aftermath of World War II, ECAs were established in Austria in 1946 and Japan in 1951. From the early 1970s to the late 1990s, a number of additonal countries in the Middle East and Asia created ECAs, including Iran in 1973, Korea in 1976, India in 1983, Egypt in 1992 and China in 1994. More recently, new or smaller countries have established their own ECAs, including Serbia and Sudan in 2005, Estonia in 2009 and Armenia in 2013.

Today, there are almost 80 countries that have established ECAs or some variation of national export support or credit insurance agencies. (A list of many of these ECAs, export credit insurers and similar entities is attached as Annex A).

ECA Risk Mitigation

The principal benefit of an ECA is to mitigate risks associated with international trade transactions. Cross-border trade in goods and services includes a variety of risks for both buyers and sellers, including credit risks related to payment for goods, as well as political risks associated with the transit and delivery of goods across borders, often at great distances. Such risks are not new, and trade participants in ancient Rome faced the same fundamental question as do modernday traders in Asia: when does the risk associated with a given transaction outweigh its desirability? Furthermore, if risk for a transaction is deemed too high by the entities to whom exporters and traders often turn to assist them—namely, banks and insurers— trade and exports can suffer as these transactions are deferred or avoided altogether due to risk concerns. 1

In mitigating inherent political and payment risk, ECAs enhance the ability of market participants to transact—whether they are sellers, buyers or financiers. ECA programs provide direct finance or guarantees of bank finance, and if not providing direct political risk insurance, they can still provide an implicit political risk "umbrella" due to their very presence in the transaction.

As project finance structures are fundamentally designed around the principles of risk identification, allocation and mitigation, ECAs play a key role in the risk-reduction goals of the participants.

Products and Services2

Although product offerings have variations among the many ECAs, typically ECAs offer the following:

  • Direct Loans;
  • Loan Guarantees; and
  • Export Credit Insurance.3

In addition, ECA products can be offered on either a "Supplier's Credit" or "Buyer's Credit" basis, with the difference being:

  • In a Supplier's Credit, the ECA loan or guarantee is made to or benefits the domestic exporter (the supplier of the goods or services) and the supplier is then able to provide financing terms to the foreign buyer, assisting their purchase of the supplier's goods or services.
  • In a Buyer's Credit, the ECA loan or guarantee is made to or benefits the foreign buyer, allowing the buyer to finance its purchase of the domestic exporter's goods or services.

Typical financing period terms for ECA products are short-term (less than two years), medium-term (two to five years) and longterm (over five years and usually 12-15 years).

Typical Structures

ECA participation in major project financing transactions generally use Buyer's Credit structures and are on a long-term (10-15 year) basis. In this way, the project company/ borrower established for the project financing can borrow the ECA loan (or borrow from banks guaranteed by the ECA) and can pair the ECA-supported financing with other project debt borrowed by the project company, thereby assembling a complete financing package for the project with long repayment tenor, enhancing project and sponsor return.

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Footnote

1 From The Changing Role of Export Credit Agencies, Malcom Stephens, International Monetary Fund, 1999.

2 This discussion and those that follow regarding coverage and terms are drawn from the programs of a number of leading ECAs, including Bpifrance Assurance Export, Euler Hermes of Germany, JBIC of Japan, Korea Eximbank, SACE of Italy, UK Export Finance and U.S. Exim Bank.

3 In this discussion we will focus on the loan and guarantee programs of the ECAs, as export credit insurance is not a major component of ECA participation in project finance transactions.

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