In fostering a swift turnaround time to respond to insurance applications, we have developed a ‘tick box’ approval process which is available on our web site, which means that approval can take as little as one week, if the applicant company meets the specified requirements of cover. “We have a range of insurance cover, and not all our products are linked to exports of capital goods and services, we also provide investment insurance, where we insure equity investments against political risk,” “The political risk cover generally insures exporters, banks and investors against expropriation, currency risk including war and civil disturbance in countries where projects are implemented,” said a business savvy Makhubele.
Performance and future outlook
During the 2012/13 financial year ECIC achieved a phenomenal result with the highest number of approvals since the establishment of the corporation over a decade ago. These approvals amounted to around USD 950m, resulting in the highest gross premium return yet, which was around R718m. The approvals were against the budget amount of around USD 600m, and for the current financial year ending March 2014, our target has been increased to USD 720m, as at December 2013, we had obtained approvals on policies to an estimated USD 580m. We are currently working on projects which we are confident that they can propel us to achieving our targeted figure,” says Makhubele.
Terry says most of the approvals made were for the export credit insurance which is linked to the export of capital goods and services and such projects has a cascading effect to job creation in South Africa. One of the key requirements by ECIC is that at least 50% of the insured amount must be South African content. SA content refers to goods manufactured in South Africa and services rendered by South African entities. In terms of total insurance exposure, over 70% of ECIC’s business is for projects on the African continent. “In the previous financial year, which ended in March 2013, our biggest exposure by country was in Zambia, which had a 25% share - mostly due to a large copper mine project in that country. “Zimbabwe had the second largest exposure with 16% which is made up of a number of small projects in various sectors. With regards to sectoral exposure, Makhubele says mining remains the largest exposure, “But we are seeing that governments are really waking up to upgrading and even expanding their socio-economic infrastructure, this will enable ECIC to expand its sectoral exposure and minimise its concentration to the mining sector.”
Makhubele explains that there are various challenges facing ECIC in the market place. “In Africa, we have identified certain challenges that contribute to higher costs of doing business by investors than in other countries around the globe; this may include lack of infrastructure and issues concerning regulations and taxes. “Most of ECIC supported projects face challenges of infrastructure support to implement projects, notably roads, rail, ports and also power infrastructure. For an example, if a mine has to supply its own power, which adds to the bottom line, it could mean using alternative power sources like diesel generators (this could add up to 20% to operational costs) or building its own electrical plant, these hindrances are quite considerable and affect the cost of doing business.
“Poor transport infrastructure, in the case of the mining sector these poses very serious challenges with regards to railway lines and sea ports. The product off takes in the continent mainly rely on the seaports and railway infrastructure transits. In some instance the railway challenges forces project sponsors to build their own railway lines, when they need to transport bulky products like iron ore, which uses rail for transportation. “This may lead to uncertainties with regards to regulatory and tax issues. It becomes unclear what to expect from governments in terms of royalty payments, fees and taxes”. On the issue of corruption, he explains: “South Africa is a signatory of the OECD Convention (Organisation for Economic Co-operation and Development) with the combating of corruption in international business transactions, we have developed an anti-bribery policy which is in line with the convention agreements.. As such, ECIC verifies its exporters prior to approval of projects, and should there be any activity of bribery in a project, we have a responsibility to report it.
Makhubele says certain typically African challenges exist in this area also. “We have identified three obstacles common in African countries.” The first is either a lack of, or bad quality financial information. Most countries have not adopted international reporting standards and are still moving towards IFRS (International Financial Reporting Standards). At the same time, legal frameworks are not yet developed. This means that even if one might have a legal case, you could not be sure of getting it through the legal system since the system in itself is sadly inadequate. Then there is a paucity of economic and trend statistics which forces underwriters to obtain their own information. Lack of industry bodies is another challenge, leaving one unable to obtain verifiable business information on some of the sectors, for instance bodies like tourism boards can be of assistance in getting verified tourism business information to support industry trends.
Makhubele ends by stating that the greatest stumbling block for any country in Africa in attracting foreign investment and this must be due to political instability in most of the African countries. “Investors and project sponsors need to minimise their risks – as do the underwriters – and these factors are always under consideration,” he concludes.
Africa remains a challenging marketplace
Lack of infrastructure adds to the cost of doing business in Africa. Not having power at a mine means adding as much as 20% to the bottom line costs to having to provide alternative power generation methodology, such as diesel generators. Bribery can take place anywhere along the value chain, but ports remain a large problem.
Underwriting Remains the Backbone of Trade Insurance
Underwriting of trade and export insurance remains a challenge, and especially so on the African continent, explains Terry Makhubele, Head of Underwriting for the Export Credit Insurance Corporation of South Africa (ECIC).
“Since the bulk of our exposure is within the Africa continent, we have to remain informed, diligent and always aware of what is happening in the continent,” Makhubele explains. ECIC is a state owned export credit agency that promotes the export of South African capital goods and related services by providing political and commercial risk insurance. “Export credit insurance is linked to the export of goods and services from South Africa to other countries and we have developed several products to promote exports. The corporation plays an active role in promoting trade and creating jobs locally and in host countries where projects are executed’.
by Ilse Ferreira