Excerpt from the World Bank's "Global Development Finance Report - 2004", Chapter 5: Financing Developing Countries' Trade
http://siteresources.worldbank.org/GDFINT2004/Home/20177154/GDF_2004%20pdf.pdf
Trade finance from export credit agencies and the private insurance market
The stock of trade finance from export credit agencies (including guarantees, insurance, and government-backed loans) and from the private insurance market increased over the 1990s. The International Union of Credit and Investment Insurers (Berne Union) reports that the stock of loans and guarantees by member organizations rose from $375 billion in 1990 to $500 billion in 20024—a decline from about 11 percent of member countries’ exports in 1990 to 7 percent by 2001 (figure 5.3).5 Of this amount, the role of export credit agencies has declined relative to the private insurance companies. Private insurance companies account for nearly half of new commitments by international credit and investment insurers ($6.7 billion in 2002), from a base of close to zero in the early 1990s. The apparent rise of private insurers is bolstered by data showing that the share of developing countries’ trade finance covered by creditor government guarantees, and the share going to the public sector, have fallen by more than 50 percent since 1990 (figure 5.4). While the Berne Union does not report exposure by country, the Organisation for Economic Co-operation and Development (OECD) reports export credit agencies’ coverage of mediumand long-term flows to developing countries, which averaged $36 billion from 1990 to 2001.6
The growth in private insurance in the 1990s. As the private insurance market has become increasingly sophisticated in analyzing and mitigating political risk, the need for guarantees from official export credit agencies has diminished (Stephens 1999). At the same time, a wave of privatizations in emerging markets has shifted export risks from a sovereign to a commercial footing. The International Monetary Fund (IMF 2001) estimates that between 85 and 95 percent of short-term credit insurance business within and beyond the European Union is now underwritten by private insurers— without the involvement of governments. The big players, including AIG, Lloyd’s of London, Sovereign Risk Insurance Ltd, Zurich Emerging Market Solutions, and Chubb, are now offering longer policy terms and increased project capacity. The increase in the number of foreign insurers in domestic insurance markets in developing countries, such AIG in China, provides these large insurance companies with on-the-ground information about market conditions and improved risk assessment.
Private insurers may have an advantage over official export credit agencies in being able to respond quickly, providing quotes in days and insuring against large risks within weeks, as opposed to months or years for official agencies (Mackie 2003). While export credit agencies are believed to be cheaper on ratings in certain categories, they may be more expensive in pricing a package of risks or a multicountry program (James 2001). This is because the private insurers are in a better position to offer discounts for large volumes and for diversified exporters. In addition, private insurers generally are better able to offer coverage for a wide variety of risks (such as business interruption, license-cancellation coverage, and contingency risks) than are export credit agencies.
However, the private insurance sector is still heavily skewed toward short-term export credit. In the medium- to long-term business, private insurers constitute only 0.2 percent of new commitments by Berne Union members. Also, for the large private insurers, growth over the past decade has been affected by a range of developed-country shocks (such as substantial claims from September 11, the collapse of equity prices, and low interest rates) that have affected both claims and investments but have not affected export credit agencies as directly.
The decline of export credit agencies.
The relative decline in the activity of export credit agencies has been due to several factors. In the 1980s and early 1990s, export credit agencies experienced considerable losses on their portfolios in developing countries. As a result, the total net cash flows of Berne Union members was strongly negative during the period. Subsequent initiatives and international agreements (including the World Trade Organization’s Agreement on Subsidies and Countervailing Measures and the 1999 Knaepen Package7 ) have attempted to strengthen the solvency of these agencies, factoring in requirements such as minimum country-risk-premium ratios. This, together with the entry of private insurers, has led to a rise in net cash flow for Berne Union members from $4 billion in 1990 to $11 billion by 2001 (figure 5.5). At the same time, pressures to eliminate tied aid and to prevent lending from having undesirable economic consequences have restricted the type of activities export credit agencies can support (box 5.2).
Box 5.2 Social responsibility and export credit agencies
In the past decade export credit agencies have moved decisively to limit corruption, guard against adverse environmental impacts, and avoid financing nonproductive projects. The move has come in response to increased public scrutiny of their activities and to demands from nongovernmental organizations that the agencies increase transparency and adopt binding environmental and social guidelines and standards (Maurer and Bhandari 2000; ECA Watch 2003).a These efforts have helped ensure that lending by export credit agencies contributes to borrowers’ growth, a prerequisite for sustainable borrowing. They also have contributed to the decline in commitments. Export credit agencies have taken steps in the following areas to improve the social responsibility of their guarantee programs:
• Tied aid. Tied aid—trade-related aid credits provided by donor governments for public sector projects in developing countries, conditioned on the purchase of equipment from suppliers in donor countries—fell from 15 percent of net official development assistance in 1991 to 3 percent in 2000 ($1.8 billion, a 20-year low). The 1991 Helsinki Package placed constraints on export credit agencies by limiting the provision of tied aid to “non-commercially viable” projects with genuine development objectives and characteristics, and by mandating that at least 35 percent of tied aid be provided on concessional terms.b
• Transparency. Export credit agencies have been criticized for their lack of transparency in decision-making (Maurer and Bhandari 2000). Some export credit agencies are now setting out their business principles and reporting publicly on their comparative position in terms of coverage, pricing, and products offered (ECGD 2003). Many now publish on their Web sites information about the exports and projects they support (Godier 2003).
• Anti-corruption and good governance. In May 2003, the OECD Working Group on Export Credits and Credit Guarantees proposed measures to stamp out bribery in transactions supported by official export credits. The OECD proposals would require export credit agencies to inform all applicants requesting export credits of the legal consequences of bribery in international business transactions. They also would oblige applicants to declare that neither they nor anyone acting on their behalf have been engaged in or will engage in bribery.
Environmental and social impact. Most members of the OECD’s Export Credits and Credit Guarantees group agreed in 2001 to implement common approaches to environmental issues. Members are now required to screen and review the environmental impact of exported capital goods and projects supported by export credits, including their potential impact on the generation of significant air emissions, effluents, waste, or noise; significant use of natural resources; and the resettlement of indigenous and vulnerable groups. The new requirements are most likely to affect projects supported by export credit agencies, but support for “nonproductive” exports— notably armaments—also has become an important issue. The G-7 has called for stronger measures by the OECD against the practice of using export credits to help poor countries buy arms and other nonproductive items (de Jonquieres, Tett, and Fidler 2000).
a. See chapter 4 for a discussion of the increasing influence of nongovernmental organizations on development activities, and UNIDO (2002) for a discussion of the growth of corporate social responsibility.
b. The requirement of noncommercially viable projects was included to ensure that tied aid would be additional to otherwise available external resources; in other words, that bilateral funds would be used for projects that offered potentially large external benefits but lacked the ability to generate sufficient financial returns to make them eligible for commercial financing.
Maurer, Crescencia, and Ruchi Bhandari. 2000. “The Climate of Export Credit Agencies.” Climate Notes, World Resources Institute, Washington, D.C. May.
ECA Watch. 2003. “Unusual Suspects—Unearthing the Shadowy World of Export Credit Agencies.” www.eca-watch.org
7. The Knaepen Package was a set of measures incorporated into the OECD’s Arrangement on Guidelines for Officially Supported Export Credits, covering minimum country-risk-premium rates and standards for determining country risk categories.