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Cooperation between development finance and guarantees for export credits

In the build up to the 10th Annual Export Finance Germany Conference, Manuel Dircks, Deputy Head of the Berlin Office at Euler Hermes discusses the importance of cooper-ation in the development finance sphere and how it can help the ECA market.

In general, export credits provided by export credit agencies (ECA) – regardless of their setup – have the objective to support local companies and in doing so maintaining industry competitiveness, contributing to job security and promoting exports. Hence, the key objective is the support of the local exporting industry. Development finance institutions (DFI) as the private sector arm of international financial institutions primarily provide support for private sector progress in developing countries by means of equity investments, loans and guarantees. Their aim is to unlock private investment and improve access to financing in a foreign country. Now these different objectives might imply limited room for cooperation. However, due to significant overlaps regarding the different mandates it is safe to say that this is not the case.

Cooperation among these institutions can take on different forms:

  • First and most common, is co-financing, where one tranche is funded by commercial banks and covered by ECAs and a second one is financed by a DFI. 
  • A second common form is ECA cover for the exporter for payments out of a DFI-tranche (which itself is not risk mitigated by ECA cover).
  • A third possibility is a DFI acting as a regular lender under an ECA cover.
  • A fourth possibility for cooperation, especially helpful in project finance, are Partial Risk Guarantees, where DFIs are able to cover risks such as feed-in tariffs, payments under power purchasing agreements and other credit enhancements.
  • A fifth possibility to cooperate is on the equity side provided by DFIs and covered by in-vestment guarantee schemes of ECAs.
  • Sixth and last, is the non-financial risk cooperation such as information and staff ex-change.

Cooperation can be beneficial to all parties involved. By mitigating or sharing certain risks the economic viability of projects can be enhanced. Risk sharing might be an opportune way when capacity constraints are reached. Both institutions can benefit from each other’s expert market, product, and country knowledge, especially in the due diligence phase of a project. In addition, they can exchange views on environmental and social aspects. Not to underestimate is the signal an involvement of a DFI or ECA might send to other parties: this is often seen as strengthening the project. For example, a project that has been approved by an ECA and DFI is likely to be able to attract funding from other sources such as commercial banks as well.

On the other hand, a barrier for cooperation might be the lack of information on products, transactions, processes, and conditions. ECAs might regard some DFI’s preferred creditor status as the major barrier for risk sharing, as ECAs tend to insist on a pari passu treatment amongst creditors.

Until now, the experience regarding risk sharing amongst DFIs and ECAs leaves room for improvement. Most stated reason for this is a lack of joint transactions followed by imperfect information exchange. This shortage of experience should be corrected. A variety of first steps have been taken to improve cooperation, reflecting both parties interest in sharing data and risks. A particularly interesting initiative in this regard is a task force as part of the Berne Union/World Bank Working Group, established in October 2013. The above mentioned barriers regarding the risk sharing should be addressed through further discussions and information exchange on a case by case basis, involving commercial banks wherever possible as they can be an important conduit to help facilitate cooperation on a transactional level.

Lastly, it should be mentioned that cooperation between DFIs and ECAs is not necessarily advantageous only for large transactions but could be helpful even for smaller transactions coming from SMEs, as examples have shown in the past.

This content is provided by Euromoney Seminars for informational purposes only, and it reflects the market and industry conditions and presenter’s opinions and affiliations available at the time of the presentation.

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