by Andrew Ngozo
LEADING EDGE | Neotel
Positioning South Africa in a Competitive Environment
In this tough global economic environment it is important for South African businesses and investors to find new markets for growth opportunities. Currently, many businesses that pursue cross border opportunities still face the spectre of political risk and limited access to long-term finance.
However, according to Mandisi Nkuhlu, the Chief Operating Officer and the Acting Chief Executive Officer of Export Credit Insurance Corporation (ECIC), “South African businesses that are pursuing an Africa growth strategy need not go it alone. Through our political risk insurance programme, ECIC actively supports many businesses to venture into new countries and access new markets which ordinarily would have been too risky.”
What Motivates you in your Leadership Role at ECIC?
In the past ten years, we have been effective in supporting ground breaking projects and in opening doors for South African companies in countries such as Mozambique, the Democratic Republic of Congo, Zimbabwe and many other tough jurisdictions.
At the heart of our strategy is an appreciation that the long-term economic growth of South Africa is linked to Africa’s industrialisation. For instance, the economic success of other countries within the SADC region will boost export trade between South Africa and the region.
Recently, the readers of the Global Trade Review Magazine have voted ECIC as the best Export Credit Agency in Africa. The strong endorsement from our clients and other industry role players serves to reinforce our strong focus in providing excellent service to our clients and innovative products that help us to address gaps in the market that the private sector insurers choose to avoid.
What are the Challenges Facing the ECIC?
With the sovereign debt crisis in the EU and the slow economic recovery in the US, many global players see Africa as the new frontier for growth and the pursuit of robust economic returns. Whilst the opportunities on the continent continue to abound, the advent of new global players has made the business environment very competitive.
Effectively, our role is to help South African contractors to compete against their international counterparts and win international contracts. In this new competitive landscape, successful contractors are those who are able to provide a technical solution and a financial solution to the owners of the project. Through political and commercial risk insurance cover, we insulate the South African banks and the Development Finance Institutions against political risk and enable them to provide a competitive finance solution as part of the South African consortium. Our support for the South African contractors is linked to local procurement requirements to boost job creation in the South African economy.
As a non-lending export credit insurer, the partnership between ECIC and the banks is critical in unlocking liquidity support from the banks, especially in the face of the Basel III requirements.
Despite the tough regulatory and stringent capital requirements brought in under Basel III, our export credit support scheme remains effective in attracting bank liquidity for mega infrastructure projects on the continent.
Where do you See the New Business Opportunities?
Even though the mining and telecom projects have featured prominently in our insurance portfolio, increasingly, we are actively pursuing more power and rail projects as part of the initiative to address infrastructure backlogs and diversify our portfolio.
In as much the African continent remains the natural market for many of our exporters, ECIC has been active in Russia and in the Middle East. More opportunities exist in Brazil, India and China. In the next three years, we expect to double the value of supported projects within our insurance portfolio and increase the level of new approvals to reach an annual target of USD 1bn.
We are pursuing a more proactive business development strategy - this is our new modus operandi. The days of sitting back and operating as an insurer of last resort are behind us. Better co-ordination among the South African business players, public and private, is critical for our success as South Africa Inc.
What is the ECIC doing to contribute to inclusive growth?
Indeed, many direct beneficiaries of ECIC support are big corporations who have the wherewithal to implement large infrastructure projects. The established players tend to have a stronger track record, technical and financial capacity and know-how to design and develop internationally competitive technologies for drilling shafts or building furnaces for smelters for capital intensive mining projects. The smaller contractors tend to participate under the sub-contracting arrangements as equipment suppliers.
In response to the Industrial Policy Action Plan driven by the dti, we have developed new products for the boat-building industry. The boat-building industry is labour intensive and has demonstrated capability to build boats for the export market.
We have also increased our commercial cover for small transactions from 85% to 100%, to help the smaller exporters who export smaller packages of equipment. Exporters with strong black economic empowerment credentials enjoy a special dispensation under the ECIC export credit scheme.
On the whole, we are developing new products to facilitate more direct participation by the SMMEs in our export credit scheme. Performance bond cover and working capital support have been the main challenges faced by the SMME contractors. Recently, we have been able to utilise performance bond cover to unlock access to advance payment guarantees for smaller exporters.
What are the Products that the ECIC Provides and what do they Aim to Achieve?
For the financial institutions we provide comprehensive insurance cover which includes 100% political risk cover and, typically, 85% commercial risk cover with the aim that the commercial risk is shared between the financial institution and ECIC. Commercial risk sharing with the bank is a risk mitigation tool that we use to filter out poorly structured transactions and test the financial viability and commercial robustness of the transaction.
As the ultimate risk taker, our due diligence processes and risk mitigation techniques form a key line of defence against the risk of excessive claims and financial losses for the Corporation.
For the exporter and the investor - the insurance policy covers political risk events only. For instance, if an investor is unable to repatriate dividends out of the host country in hard currency they would be covered for 90% of the losses incurred in this regard.
In the case of the exporter, if the supply contract or works done are suspended due to political risk events in the host country, which impede the construction of the project, the exporter is covered for the resultant losses. The host country may decide to expropriate the project assets or revoke the mining licence unlawfully - ECIC will pay out the exporter for losses suffered.
What are the Three Top-of-Mind Tasks that you are Currently Seized with?
Similar to Basel III that applies to banks, the insurance industry in South Africa is implementing the Solvency Assessment Management project which seeks to ensure that our risk management activities are embedded and integrated with the business strategy. The second key area of focus is the upgrading of our IT infrastructure and the implementation of new applications to improve operational efficiencies and enhance quality assurance in our workflow processes. The third area is to raise our profile and extend the reach of our influence to new clients, especially the smaller exporters.
Do you think the Market Understands the ECIC’s Mandate?
There is sometimes a perception out there that ECIC is a lending institution. We continually engage the ECIC stakeholders to clarify the mandate and the role of the ECIC in facilitating export trade and cross border investments.
We run many sessions with the export councils and provincial development agencies to extend the reach of ECIC and utilise these sessions to educate the market and the new entrants on our role and products. Bringing investors, financial institutions and contractors together to form vital partnerships that position South Africa’s offering as the best is of utmost importance to the ECIC.
Why is it Important for the ECIC to Diversify into New Sectors?
Traditionally, South African contractors tend to be strong in mining and the growth of our portfolio has tended to mirror this trend. One of the main risks that has faced ECIC over the years is over-concentration of the portfolio in a few sectors and a few countries.
Our strategy to dilute the concentration risk is linked to the growth of the portfolio. Through a growth strategy, we have been able to diversify our portfolio by sector and geography and we have succeeded in reducing the concentration quite significantly.
The rail sector in particular and the green economy, present new opportunities for developing the manufacturing sector and growing the industrial base in South Africa. To date, ECIC has supported two major rail locomotive transactions in Sierra Leone, with further opportunities in other countries.
In the power sector, home grown technology for pre-paid meter systems presents new opportunities for growth on the continent. ECIC is actively engaged in these new initiatives.
What is your Opinion of Corporate Responsibility?
Even though the ECIC mandate places us at the heart of facilitating export trade and job creation initiatives, given the immense challenges of underdevelopment and inequality in our country, we have the responsibility to implement Corporate Social Investment initiatives to benefit communities with a strong focus on women, youth and people with disabilities.
The ECIC recently finalised its Corporate Social Investment strategy and implementation plan, which focuses on education, skills development and welfare activities to address the needs of the previously marginalised groupings. A bursary scheme which is aimed at students who want to pursue studies in the field of actuarial science, accounting, economics and science is under consideration.
What is the Biggest Challenge that you Face Going Forward?
Ensuring that ECIC pursues a strategy of managed growth which increases the economic impact of our activities without compromising the long-term sustainability of the Corporation.
What is your Parting Message for CEO Readers and the Public?
In as much as South Africa is the largest economy on the continent, we should not be complacent about our continued leadership role in this regard. A better co-ordinated approach is needed for South African businesses to access the new business opportunities that emerge on the continent. ECIC has the capacity and capability to be an effective vehicle and partner for pursuing this strategic objective.