Trade Insurance: Impact Assessment. Impact Assessment

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1 Africa Trade Insurance: Impact Assessment Draft Report: Submitted to: African Trade Insurance Agency FOCUS: Introduction Background and Context African Trade Insurance Agency (ATI) ATI s Business Activities Stakeholder Feedback Impact Assessment Summary and Main Issuess Raised Strategic and Programmatic Recommendations for Improvement Conclusions October 26, 2010 W O R L D E X C H A N G E P L A Z A. P. O. B O X O T T A W A. O N T A R I O. K 1 P 1 B 1. C A N A D A TEL.: FAX: info@i-financialconsulting.com

2 Table of Contents 1.0 Introduction Purpose of Impact Assessment Approach to Assessing ATI s Impact Background and Context of ATI African Economic Performance African Trade Main Challenges to African Trade African Foreign Direct Investment The Political and Commercial Risk Insurance Market African Trade Insurance Agency (ATI) Background Present Business Models and Products ATI s Business Activities Underwriting Transactions Undertaken Since Inception Foundation: Rationale, Business Model Financials, Budgets and Business Plan Stakeholder Feedback Introduction Face to Face Meetings and On-line Survey Impact Assessment Introduction of Impact Assessment How Impact is Measured Dimensions of Impact Summary and Main Issues Raised Positive Impact and Feedback Negative Impact and Feedback Strategic and Programmatic Recommendations for Improvement ATI SWOT Analysis Strategic Posture Staff Turnover ATI s PRI/CRI Key Success Factors Key Strategic Issues Requiring Address Conclusions i

3 List of Tables and Figures Table 1: Total GDP Growth Rate (%)...3 Table 2: African Export Growth Rates...5 Table 3: Regional differences in significance of Agriculture Table 4: PRI Providers as at Table 5: Commercial Market Overview... Error! Bookmark not defined. Table 6: Income Statement Table 7: ATI Sources of Business Table 8: ATI Balance Sheet Table 9: Long Term Rating Table 10: Impact Parameters Table 11: Impact Assessment Figure 1: Comparative GDP % Growth - Africa s Performance...4 Figure 2: Per Capita Growth Rate...4 Figure 3: Factors Affecting African Trade with the World...5 Figure 4: FDI Inflows, global and by Group of Economy (US$ Billions)...7 Figure 5: Percentage of Trans-National Corporations Planning on Cutting Investments in Various Regions...8 Figure 6: Where do Africa s FDI Flows Come From?...9 Figure 7: Sub-Saharan Share of World Investment Figure 8: SINOSURE s Underwriting Portfolio (%) Figure 9: Insurance Capacity [Amounts in US$ Bn.] (2009) Figure 10: Maximum Capacity Available by Tenor Figure 11: Total Number of Policies Figure 12: Sectoral Distribution: ATI Policies Figure 13: Expenses to Income Figure 14: Liabilities to Assets Figure 15: Growth in Share Capital - Figures in US$ Figure 16: Face to Face Meetings Statistical Representation of Respondents Figure 17: Percentage of Total Interviews in Kenya Figure 18: Percentage of Total Interviews in Uganda Figure 19: Percentage of Total Interviews in Rwanda Figure 20: Percentage of Total Interviews in Zambia Figure 21: Balanced Business Scorecard (BBSC) Figure 22: Political Risk Map Figure 23: Policies Bound on a Per Country Basis ii

4 List of Acronyms ADB ATI BOD COMESA CRI ECA IDA IFC MIGA PEV PRI PRI E PRI L SADC SME SO T&S USAID WTO ZEP / PTA African Development Bank African Trade Insurance Board of Directors Common Market for Eastern and Southern African Africa Credit Risk Insurance Export Credit Agency International Development Assistance International Finance Corporation Multilateral Investment Guarantee Agency Post Election Violence Political Risk Insurance Political Risk Insurance - Equity Political Risk Insurance - Loans Southern African Development Countries Small and Medium Enterprises Single Obligor Terrorism and Sabotage United States Aid Agency Whole Turnover Preferential Trade Area iii

5 Executive Summary The African Trade Insurance Agency was created under the Trade Finance Facilitation Project of the World Bank in order to act a as a stimulant for trade and investment in Sub-Saharan Africa. Its mandate was to provide Political Risk Insurance and limited Commercial Risk Insurance that could provide the necessary mitigation of risks to support Foreign Direct Investments [FDI] and export insurance. ATI was established in However, with low uptake of its original product range and mandate, submissions were made to the World Bank in 2006 that led to the amendments on the ATI Charter by giving a wider and more flexible mandate to provide a more aligned product range covering both Political and Credit Risk Insurance. Over the last nearly 10 years of existence, ATI has grown considerably in terms of business, signing less than 4 policies in the first 2 years compared to over 150 policies in the last three years. With the new capital structure, ATI s present business model has been in operation since mid 2006 and hence its largest number of bound policies in that period. The review and assessment covers the entire period of existence of ATI but recognises that its business model has become significantly effective in the latter period only. The Purpose and Object of the Agency [ATI] is to provide, facilitate and encourage and otherwise provide the provision of, or the support for insurance, including coinsurance and reinsurance, including the issuance of guarantees and other insurance and other financial instruments and services, for purposes of trade and investment and other productive activities in African State in supplement to those that may be offered by the Public or Private sector, or in cooperation with the public or private sector. A. Purpose and Methodology The purpose of this Assignment is to provide a report on the impact of ATI in facilitating trade and investment in Africa and to develop a Monitoring and Evaluation Framework for monitoring and improving the impact on an annual basis in view of the membership expansion and strategy ATI is undertaking. The Consultants have used a multiple source of evidence to establish and corroborate the findings. These are in the main as follows: a) Face to Face Interviews; b) Web based questionnaire; c) Targeted addressed to specific stakeholders; d) Statistics and other publicly available sources of information. B. Sampling An important aspect of the review and feedback analysis was based on a fairly large sample. Notably, given the existing business bound in the region, the Consultants were able to meet with and obtain information from approximately 37% of the target stakeholders which included both practitioners and users of the ATI policies as well as shareholders and other public / private stakeholders and will have a margin of error due to timing, content and bias of questions and specific understanding of the target group. iv

6 C. Key Outcomes of the Impact Assessment The Report covers the issues raised and captures the identified area of impact as well as its recommended mitigant and enhancement. The main parameters set for the assessment are as follows: Summary of Findings Parameter Relevance Efficacy Efficiency Impact on Regional Trade and Risk Perception Value for Money of ATI Member States Partnerships Score Excellent Excellent Satisfactory Good Excellent Excellent It is the conclusion of the Impact Assessment Report that ATI has met its purpose and objective as an institution. The Report has further illuminated the areas of strength and weakness identified and highlighted both by users and other stakeholders. These are summarised hereunder: Positive Response and Feedback Impact/Feedback Most clients of ATI are satisfied with the service and cover they receive both for Political as well as Commercial Risks A number of Banks pointed out that without ATI participation they would not have been able to lend to their clients Most exporters are sure that without ATI CRI products they would not have been able to export to certain markets or been able to increase their overall exposure to certain markets Investor companies including development banks which have benefited from ATI Recommended Enhancement Additional facilities may be cross-sold to the existing clients. A guided ATI / Customer Interaction Module should be introduced for post binding marketing to be handled by Underwriters. All the Banks which were interviewed indicated that ATI s role has greatly enhanced their ability to take on risk. Banks will form an anchor partnership with ATI. A Research & Development team should work at developing practical Banking Facilities developed around ATI PRI & CRI products. The default risk of counter-parties trading across borders and within Member countries is real. It is important to widen the breadth of participating exporters through stronger partnerships at Export Promotion Centers. ATI s products are crucial to mitigating Political and Commercial risks. Building networks through wide-angle v

7 products stated that they would not proceed without PRI / CRI products Most respondents have commended ATI for their speed and offering of professional service response time and turnaround time appear to be above the industry average ATI Products have allowed for financial deepening in providing a means of risk mitigation that could stimulate both primary and secondary Financial Markets ATI Products have had important milestone impacts including [but not limited to]: Job creation; Infrastructure development; Transfer of technology; Incremental availability of Bank and Financial Services funding [financial deepening]; Incremental exports and sales to new and existing markets; Increased profitability; Import substitution and foreign exchange earnings; South /South collaboration associations in each target country will form a basis of knowledge and access to ATI. This is notably important due to stiff competition from alternative providers. This indicator was split between positive [for PRI and CRI Single Obligor] in which the experience of turnaround times was acceptable to good. However CRI WTO products appear to take a very long time to turnaround mainly challenged by information availability of the target group. Much wider and more aggressive information gathering will be crucial to ATI success. There is a need to partner with service providers with skill and capacity for information gathering. It should be established whether World Bank or a senior donor can develop a nascent commercial information provider. Financial deepening allows growth in banking and finance through instruments that free up capital as well as creates new and flexible ways of sharing and mitigating risks therefore allowing further liquidity to the market. ATI instruments [PRI& CRI] are classic vehicles that have demonstrated financial deepening in the Region. These development impacts have been verified in the meetings and surveys. vi

8 Negative Response and Feedback Impact / Feedback A number of respondents have raised the issue of costs being high and that whilst they appreciate the coverages, they feel the cost is enormous; Many of the Exporter Organisations have named cost as the main impediment to higher utilisation of ATI products A few respondents have indicated that ATI has not responded or followed-up on key leads for business opportunities Poor visibility and public awareness is rated one of the key concerns so far. It was mentioned over and over even among contacts / stakeholders who view ATI very positively A poor understanding of the range of products available by ATI in its existing and potential markets was apparent through the surveys undertaken Recommended Enhancement The issue of cost is notably one of the factors that have kept the turnover of bound policies low. This is true for SME and down-stream supply chain enterprises. This low uptake and perception that the cost is high is also related to the unfamiliarity of PRI / CRI products in the Region. HR Turnover may have impacted on this response. An institutional correspondence tool that captures and tracks the action taken each letter / note / memo should be implemented as part of an ERM strategy. Apart from existing strategies, a clear visibility and educational platform will have to be put in place to ensure that ATI profile is enhanced. This could prove fatal if stakeholders [particularly governments] begin to plan their own country level ECA. Visibility and market presence is a key success factor. Training, seminars and other educational means must be used to develop an understanding of ATI and PRI / CRI products. vii

9 1.0 Introduction 1.1 Purpose of Impact Assessment The overall purpose of the Impact Assessment (IA) assignment for Africa Trade Insurance (ATI) is to provide a report on the impact of ATI in facilitating trade and investment in Africa and to develop a Monitoring and Evaluation Framework for monitoring and improving the impact on an annual basis in view of the membership expansion and strategy ATI is undertaking. The assignment therefore establishes a methodology to ensure undertaking impact assessments on a regular basis through a builtin impact rating tool, which is easy, cost effective and efficient to apply. This will build more trust from stakeholders, enhance marketing initiatives and establish greater support through increased membership in ATI. As part of the assignment, an Inception Report [IR] was submitted in July The Inception Report covered the following areas: An overview of ATI activities based on the review of internal documents such as the balance sheets, manuals, business plans and other relevant documentation; Reports on stakeholder consultations undertaken that covered all the face-to-face interviews and telephone discussions capturing key developmental data and issues that ATI has achieved since its inception; Preliminary observations covering the stakeholder review as at the time of the Inception Report. Subsequent discussions and data have since been collected and will inform the out-put of this report. Following the submission of the Inception Report, a Presentation was made to the ATI Board of Directors on the 18 th August The Board of Directors expressed the need for clarity on the following issues: a) the expected output from the Final Report should express clear "benefits of ATI products" that can be used in marketing ATI to those governments finalizing their commitments to joining ATI or new governments that have yet to join. It is therefore important, as part of the envisaged output, that the Impact Assessment address the pertinent issues in a summary sheet that can be easily produced as evidence of the impact of ATI going forward; b) the Final Report address itself clearly to any product gaps that may be identified in the course of the exercise. Notably the Board of Directors emphasized the need to have the Report by December when they shall have a retreat to discuss the Strategic Plan for the next 5 years. It was noted that this Report would have a very crucial bearing to the meetings. Annex A sets out the detailed Term of Reference and Deliverables. This Report is part of the deliverables envisaged. The consulting team from International Financial Consulting Ltd, including Diana Smallridge (President) and Gabriel Kivuti (Senior Associate) are indebted to the assistance received from the Management and 1

10 Staff at ATI in making available material and records as well as making arrangements to meet with key stakeholder in Kenya, Uganda, Rwanda and Zambia. In this respect we wish to extend our sincere gratitude to Mr. Stewart Kinloch, Chief Underwriter, Ivan Allipi - CFO, Cyprien Sakubu Chief Investor Relations, Humphrey Mwangi Senior Underwriter, Sherry Kennedy - Communications and Marketing Officer, Pizzaro Lukhanda, Underwriter Zambia and Malawi, Allan Mafabi, Underwriter Uganda, Catherine Gachanja, Rennie Kariuki, Caroline Kinyanjui and Sheila Ongas. The Consultants confirm that they have addressed the Terms of Reference s and the concerns raised by the Board of Directors, inter alia. The Consultants also note that Impact Assessment (Chapter 6.0) is for public consumption but this Report remains confidential. It is also noted that names of some of the interviewees are not disclosed as agreed with the respondents. 1.2 Approach to Assessing ATI s Impact In order to assess the impact ATI is having, multiple lines of evidence and data as constructed above as well as public information in which we have researched evidence to corroborate findings that have been collected. These have included: Research, including best practices of Impact Assessments by similar organizations Consultations, with clients and other stakeholders (see Annex B for a list of people consulted) Analysis of findings based on qualitative and quantitative input Stakeholder input was sought through the following means: Face to face meetings with clients; Telephone conversations; Web-based questionnaire; targeted at a number of respondents. In addition to the data collected directly from users of ATI products, the consulting team have also researched a number of external and internal sources of data that establish the impact of ATI and enable the Consultants to draw conclusions based on empirical evidence. The IA is undertaken based on a number of key assumptions. Key amongst these are the following: That the respondents of the web-based and requests for information will be candid and complete containing qualitative and quantitative data as requested; That the structure of the questions and interviews allows for maximum address to the Terms of Reference and enables the capture of crucial feedback for the completeness of the Report. That the data available from the public sources will be correct. In submitting this Draft Impact Assessment it is recognized that the Final Report will be a public document. We shall be submitting the Final Report in both a complete format for the confidential review of both ATI and the World Bank as well as in an abridged format that will be for public consumption. 2

11 The Report is structured as follows: The first part is made up of the Background that discusses the Global and African environment in which ATI is operating under; The key findings and lessons of the Assignment including the ground covered in the ATI Impact Assessment; Key Recommendations and Conclusions. 2.0 Background and Context of ATI This section discusses the background and context in which ATI operates. 2.1 African Economic Performance The world economic indicators have shown positive growth through most of the last ten years and contracted only in the last 2 years precipitated mainly by the World Economic Crisis and the Financial Crisis. The World Economy grew by 3% over ten years. Africa had one of its best decades growing at about 5.3% over the same period. 1 Notably the growth in GDP has also translated into higher per capita growth in Africa in global terms with the World per capita at 1.6% on average for the last decade compared to 3% in Africa. Notwithstanding Africa s above average growth from a % standpoint the poverty statistics indicate that over 41% of Africa s population lives on less than US$ 2 a day and that over 36% of its population are malnourished. 2 Africa s socio-economic and political challenges range from poor management of public resources and corruption through the lack of well developed and accountable institutions which has led to the overall high political risk environment. Pockets of change for the better are often held at ransom by highly ambitious and well funded interests that do not allow time to develop and fathom real change. Stable socio-political environments are few and far between. Table 1: Total GDP Growth Rate (%) Total GDP Growth Rate (%) p 2011p World Developing Economies* Africa Sub-Saharan Africa Source: World Economic Report, World Bank *All Developing Countries index 1 World Economic Report World Bank, UNCTAD, WTO. 2 World Economic Report World Bank / UNCTAD, MIGA 3

12 Figure 1: Comparative GDP % Growth - Africa s Performance Source: WTO, UNCTAD 2010, 2011 Projections Figure 2: Per Capita Growth Rate Source: UNCTAD 2.2 African Trade Africa contributes less than 2% of the world trade in terms of merchandise and services indicators but continues to grow, albeit from a low base. However, intra-african trade has been on the increase and now accounts for about 14% of Africa s total trade. 4

13 Table 2: African Export Growth Rates Item Region f 2011f Growth rate of total exports of goods at current prices Growth rate of export of goods at constant prices Sub-Saharan Africa Source: World Trade Report, UNCTAD, World Bank Africa Sub-Saharan Africa Africa Growth of African exports has been strong over the last decade, although saw significant hit during the financial crisis in Africa s contribution to world trade has been constrained by factors that have significant impact on the overall performance of growth and trade. These factors have deep significance on the areas that continue to plague the continent in terms of other indicators such mortality rate, poverty and literacy. In a nutshell, significant trade figures will be affected by the following: Figure 3: Factors Affecting African Trade with the World Factors affecting African Trade with the World Low Value Added Illiteracy Low market integration Poor data collection Poor international prices for commodities Poverty Poor infrastructure Low access to Finance Unfavourable terms of Trade Governance & Corruption Tariff Barriers 2.3 Main Challenges to African Trade Low Value Added Closely linked to illiteracy and poverty, Africa s exports are dominated by basic commodities in which there are low levels of Value Added and insignificant differentiation making the goods recover low levels of return. Comparative prices of Coffee, Cocoa and Tea at the primary levels indicate a return of between 1 to 10% of the value of the high street supermarket price of the finished value added and branded items in developed countries. In recent years the push for fair trade is attempting to bring equity to bear by channelling exports through traceable means in the supply chain and motivating 5

14 downstream recovery of pricing to the benefit of producer / exporters. High end commodities such as oil and metals are also basically exported as primary commodities and then re-imported by the same countries as finished / value added products. Nigeria is one of the leading exporters of crude oil in the world but is also a major consumer of refined oil products that it re-imports for its domestic needs Illiteracy Illiteracy has contributed greatly toward low levels of technological value added. The world is experiencing the technological age and Africa must recognize the need for technological innovations for goods and services in order to compete. Low literacy levels also stunt the use of imported options thus the low level of participation on the world stage Low International Price for Commodities The international commodities market has for a long time been plagued with subdued price levels. However the last decade has experienced some of the best prices for basic commodities mainly driven by the exponential growth of BRIC 3 countries that have increased demand for the same and have had the effect of rising prices. That said, the previous decades experienced much lower levels of commodity prices and this is also cited as a contributor to low levels of financing available given the low returns and volatility of prices in the international markets Poor Access to Finance Intertwined with unfavourable trade terms is the poor access and high cost of financing. International Bank lines limit the extent of exposure they can take on Africa. Additionally the low level of access to finance makes it difficult to obtain finance due to the measured risk approach as well as available lines for long term credit. This leads to cherry picking and risk avoidance on the part of Banks which in some instances use customer deposits to invest in Treasury Bills with high returns rather than in borrower needs Unfavourable terms of Trade Finance Unfavourable terms of trade finance is also cited as a key impediment to growth of Trade with and within Africa. The demand for traditional sources of trade financing have been very punitive to entrepreneurs which inter-alia require importers to either pre-pay or arrange Letters of Credit which as a result of low Bank lines available for Africa have required that the buyer / importer place 100% cash margin for the same. The cost of financing the opening of such LC s means that crucial working capital is tied up for long periods of time and in fact throughout the life of the import cycle. For exporters the stiff international competition has dictated that exports are made without requiring the assurance of payment via traditional instruments i.e. LC s. Exporters who wish to expand their markets and have to break into strong and defined moulds of competitive environments have to take major market risks such as shipping goods on an open account basis or at best payment against acceptance of documents [DA]. The risks in trade include: Country risk Counter-party risk Bank risk 3 Brazil, Russia, India and China [BRIC] 6

15 2.3.6 Other Impediments Africa s trade impediments can be traced to other very crucial fundamentals including [and not exclusively]: Poor government policies related to support of trade through taxation and tariff barriers; Poor governance of export sectors through corruption and inept leadership; Poor infrastructure and lengthy clearance procedures; Another factor relates to low level [although increasing] levels of intra-regional or intra-african trade which presently accounts for only 14% of African trade. Access to markets can be hampered by low levels of Foreign Direct Investments [FDI] for which Africa also reflects poorly as a preferred destination of [particularly] private equity. 2.4 African Foreign Direct Investment According to the World Investment Report for Africa received some US$ 88 Billion in FDI by Whereas a slump in FDI was experienced in 2009 following the World Economic Crisis it reports that over the preceding 5 years FDI has experienced un-interrupted growth. Figure 4: FDI Inflows, global and by Group of Economy (US$ Billions) The World Investment Report indicates that FDI has fallen below the US$ 1.2 Trillion mark by the end of 2008 and expects that recovery to pre-2008 levels will be attained by However, the report also points to some inconclusive or puzzling results of various surveys undertaken by UNCTAD in respect to FDI prospects. Transition Economies refer to those that are shifting from centrally planned and controlled environments to free market. These include many of the former Soviet Union countries including Russia and other countries such as Cambodia and China. The hallmarks of Transition Economies are: 4 World Investment Report - UNCTAD 5 World Investment Report MIGA / World Bank

16 Liberalisation - The process of making most prices to be determined by market forces; Macroeconomic stabilization discipline in fiscal and monetary policy leading to control and reduction of inflation and progress toward sustainable balance of payments; Restructuring and Privatization creation of a viable financial sector as well as restructuring state enterprises allowing them to meet free market standards and prices and progressively transferring them to private sector; Legal and institutional reform redefining the role of the state and introducing rule of law which encourages appropriate competition policies. Figure 5: Percentage of Trans-National Corporations Planning on Cutting Investments in Various Regions The surveys indicate that Sub-Saharan Africa is one of the Regions least likely to be affected in decisions by Trans-National Corporations (TNC s) to cut back based on the impact of the World Economic Crisis and the Financial Crisis. TNC investment in developing countries and Africa in particular is both significant and strategic. Significant because it focuses on development of core agricultural capacity that is capable of retaining the local support from Government policies [and relative laws] as well as strategic because of the importance of food security. 8

17 International Financial Consulting Ltd. Table 3: Regionall differences in significance of Agriculture Figure 6:: Where do Africa s FDI Flows Come From? 9

18 Significant interest in Africa is evidenced in surveys and statistics undertaken. Developing countries account for more than 45% of the World s FDI statistics according to MIGA/World Bank 6. Figure 7: Sub-Saharan Share of World Investment Source: World Bank / MIGA Sub-Saharan Trade accounts for just over 2% of the World FDI. These statistics also reveal that over 50% of the said investments are related to FDI in Nigeria, Angola, South Africa and the Sudan. These countries have been sources of new oil and gas finds on the continent. One of the key BRIC players in Africa has been China. With China s economic growth over the past two decades has come an increase of outward investment flows. This has been encouraged by a number of factors not least the Government s go global policy. This policy has been enabled by fiscal incentives and financial assistance. FDI from China has grown from US$ 11.3 Bn. in 2003 to US$ 53 Bn. in World Investment Report MIGA / World Bank 10

19 In supporting this strategy, SINOSURE [China s Export Credit Agency (ECA)] plays a significant role and has been anchor support for investment in South East Asia, Africa and South America. SINOSURE was established in 2001 with a mandate to promote exports and cross boarder investment through export credit and investment insurance for both inward and outward investment. SINOSURE s underwriting portfolio reached US$ 5.3 Billion in Figure 8: SINOSURE s Underwriting Portfolio (%) Source: MIGA PRI 2009 Report 2.5 The Political and Commercial Risk Insurance Market ATI is a member of the Prague Club [supported by the International Union of Credit and Investment Insurers, known as the Berne Union]. The PRI market is broadly made up of three categories of providers and covers both export [trade credit insurance] and investment insurance. The public PRI comprises national and multilateral institutions. The Private PRI falls into two main categories which are (a) political risk activities similar to public insurance [FDI, political violence, expropriation] and (b) emerging market non-payment insurance [contract frustration and default by governments]. CRI providers offer comprehensive risk insurance for counterparty [commercial] defaults including protracted and extended payment, default and insolvency. There are four categories of PRI providers some of which also provide Credit Risk Insurance: 7 Sourced for the PRI Report of MIGA Base Statistics from Berne Union 11

20 Table 4: PRI Providers as at 2009 Category National PRI Providers The Multilaterals The Private PRI Market The Reinsurers Function These comprise mainly of ECA s and include Export Import Banks, export credit agencies and investment insurance agencies. The largest players in this market are Euler Hermeses PwC [Germany], NEXI [Japan], OeKB [Austria] and SINOSURE [China] whichh combined account for 38% of the Berne Union (BU) members. These include MIGA, ATI, Inter-Arab Investment Guarantee Corporation, Islamic Corporation for the Insurance of Investment and Export Credit, Asian Development Bank [which also provide partial risk guarantees] These include some 18 Lloyd s Syndicate Members and another 10 private insurers operating in London, Bermuda and Singapore. These companies also offer a combination of PRI and CRI. The most dominant players are: Chartis Insurance, Zurich, Sovereign eign Risk Insurance Ltd. and Chubb which combined account for 43% of the BU members. These Reinsurance companies write PRI related coverage in both Trade and Investment. The dominant players are Munich Re, Hannover Re, Swiss Re, Berkshire Hathaway, General Re. ECA s and multilaterals [including ATI] also reinsure at a much smaller scale. The PRI market now covers about 10% of the total FDI market. The maximum insurance capacity as 2009 is dispersed as follows: Figure 9: Insurance Capacity [Amounts in US$ Bn.] (2009) Source: FirstCity Partnership Ltd. The data above reflects that there is greater appetite for shorter tenors than for longer tenors and that there is in fact no appetite for commercial trade risks beyond 7 years [reflective also of the nature of trade transactions]. The same information shows the actual figures. 12

21 Figure 10: Maximum Capacity Available by Tenor Source: FirstCity Partnership Ltd. 3.0 African Trade Insurance Agency (ATI) 3.1 Background The African Trade Insurance Agency [ATI] was formed and launched in 2001 as a multilateral initially as a World Bank Regional Trade Facilitation Project whose fundamental aim was to provide support for increase in trade and investment initially in these COMESA countries: Kenya Uganda Tanzania Burundi Rwanda Madagascar Zambia Initially ATI was to focus on its core mandate of providing Political Risk Insurance to compliment MIGA [the World Bank s investment insurance arm]. As part of its initial implementation ATI could provide both short term and long term PRI products with a specific requirement that a transaction or project which had at least one part [inward or outward] of its risk in one of the Member States would be eligible for PRI cover. In 2006 ATI presented amendments through the Trade Facilitation Project that weree presented to the World Bank Board for approval thatt recognized the following: 13

22 a. ATI had [as at the time of the review] issued more than 25 policies and/or policy renewals, including eight (8) intra-regional transactions. Total transaction value exceeded US$168 million for trade and investment transactions using ATI resources totalling US$29.4 million. b. The mobilization of US$138.6 million in private and public coinsurance, reinsurance capacity clearly highlighted ATI s role in attracting the private sector to an area in which it previously had little interest. ATI sought the following amendments that would enable it to become the African Export Credit Insurance provider of choice on the continent by amending mandate and formation documents: Diversification and restructuring of the capital base. Initially the Capital Structure required that the capital amount for each specific Member Country was retained separately in the Trust Account structures in the Overseas Bank. It was noted that the access and facilitation limited each country to the value of their Capital and commitment. This seriously curtailed the business versatility of ATI. Going forward it was proposed and agreed that the Capital Accounts for each Member State was to be consolidated into a pool account that would singularly be leveraged for the ATI business. Additionally it was agreed that more non-state Members would be encouraged to join [in addition to PTA Bank, PTA Reinsurance and Atradius]. Diversify its business products to become more aligned with the market by providing nonpolitical risk insurance including Commercial Risk Insurance. This would bring the product offered by ATI more in line with the demand in the member states and beyond. These changes had been effected. It was however noted that Atradius had partnered with ATI to offer this insurance [WTO Whole Turnover Insurance] but was unable to provide the partnership for African buyers due to restrictions on it by its own re-insurers. Subsequent approvals were made allowing ATI to enjoy the flexibility and agility required to add value to the African Investment and Trade terrain. In adopting the new business approach the Mandate Documents were amended to read as follows: Article 4 [Objects and Purpose of the Agency] Object and Purpose The Purpose and Object of the Agency [ATI] is to provide, facilitate and encourage and otherwise provide the provision of, or the support for insurance, including coinsurance and reinsurance, including the issuance of guarantees and other insurance and other financial instruments and services, for purposes of trade and investment and other productive activities in African States in supplement to those that may be offered by the Public or Private sector, or in cooperation with the public or private sector. 14

23 Functions To serve its objects and purpose the Agency shall: Facilitate the development of trade, investments and other products and other productive activities in African States, through the provision of or support for insurance, coinsurance, reinsurance, or guarantees against non commercial and commercial risks; Establish and administer on behalf and with concurrence with Member States, whether jointly or severally, insurance, coinsurance, reinsurance and guarantee schemes and facilities for promoting trade and investments and other productive activities in African States; Mobilize financial resources necessary and useful to achieve its object and purpose; Undertake such other activities and provide such other services as it may consider incidental or conducive to the attainment of its object and purpose Article 8 [20] Business Procedures & Products Subject always to such policies that the Board of Directors shall adopt from time to time, the management of the Agency shall have the authority to: Determine what risks and persons shall be eligible for the support of the Agency; Set the terms and conditions of policies of insurance, coinsurance, reinsurance or contracts of guarantees issued or supported by the Agency; Establish the rates and charges, fees and other charges if any, applicable to each policy of insurance, coinsurance, reinsurance and contract of guarantee, issued or supported by the Agency and; Bind the Agency under contracts of insurance, coinsurance, reinsurance and contracts of guarantee and to deal with all matters relating to claims under such contracts. 3.2 Present Business Models and Products The main driver of ATI product delivery is the Underwriting Department. It is worth noting that most of the business that has been underwritten by ATI has been sourced and processed without the use of brokers. In meeting the ever-increasing challenge of business identification and processing, additional underwriters and the necessary use of brokers will be essential in developing a robust sustainable business. The Department has invested substantially in training and exposure so as to maximize the intensity and depth of ATI in the market place. A key area of concern in the market place is the low level of awareness and visibility of ATI which - with support of other departments (not least, Communications and Investor Relations) will combine to develop a strong business. ATI is organized as a multilateral providing both PRI and CRI products. ATI is a member of the Prague Club and adheres to a broad set of guiding principles. 15

24 ATI has organized itself with the Underwriting Department focusing on the core business of the organization that of concluding the binding of policies. The Department has the manuals and departmental operating instructions which are tools for operationalizing the objectives of ATI. Originally ATI was established to provide PRI products [non-commercial]. However, since 2006 / 2007 ATI now offers the following Political Risk Insurance and Commercial Risk Insurance Products: Political Risk Insurance [PRI] Under the flagship products of PRI the organization currently offers the full range of PRI products as follows: Expropriation This kind of political risk insurance is purchased by exporters, lenders, investors and contractors with inventories, equipment or other assets located in foreign countries. It protects against confiscation, expropriation, nationalization and other foreign government s illegitimate actions which may deprive the policyholder of its rights of ownership or control of assets without appropriate compensation in a freely convertible currency. Related political risks include forced abandonment, selective discrimination, and "creeping expropriation" (a series of individual government actions which, taken together, effectively result in expropriation). Political Risk Insurance can also cover re-investment of future retained earnings or non-transfer of dividends, royalties or other funds following the sale of an asset or disposal of an investment Transfer Restrictions There are two types of political risk insurance relating to currency risks. One deals with the conversion of local currency into hard currency and the other addresses the ability to transfer hard currency out of the country. Currency inconvertibility and transfer risk policies apply to losses resulting from financial crises, hard currency shortages or arbitrary political decisions by a foreign government. Political risk coverage protects local currency dividends, debt service, fees, return of capital or nonpayment of trade receivables by a foreign government or private-sector buyer. Lenders can cover the conversion and remittance of principal and interest payments due under an insured loan agreement, while an equity investor can similarly cover their dividend or profit remittances derived from the insured investment and the return of capital. Companies providing management or technical assistance can cover fees and royalties. Coverage protects against losses from an investor's inability to convert local currency (capital, interest, principal, profits, royalties or other monetary benefits) into foreign exchange for transfer outside the host country. ATI s coverage also insures against excessive delays in acquiring foreign exchange caused by the host government's actions or failure to act. It is important to also note that this cover does not include currency devaluation. 16

25 War, Civil Disturbance, Civil Commotion This coverage offers protection against destruction, disappearance or physical damage to tangible assets caused by politically motivated acts of war or civil disturbance including revolution, insurrection and coups d état. War and Civil Disturbance coverage extends to events that result in the total inability of the company to conduct operations essential to its overall financial viability (Forced Abandonment). Terrorism and sabotage can also be covered Embargo In this instance, cover protects against financial loss due to trade embargoes or any other sanction imposed by the Security Council of the United Nations, or by any country or group of countries against the Host Country Arbitral Award Default ATI protects lenders or investors against the non-honouring of an arbitral award in their favour by the host government. If the award was withheld due to a breach of contract in a Project Agreement (or rejection of the Project Agreement) by the government, which prevents one from receiving the guaranteed reimbursement amount; and clearly states that such a breach by the government was the cause of the loss Comprehensive Non-payment [cover for Sovereign and Sub-Sovereign Obligors] For loans to (or guarantees by) a sovereign or sub-sovereign obligor, Non-payment coverage protects against financial losses due to non-payment of loans, sales or service contracts by the sovereign or subsovereign obligor. This is also known as contract frustration Mobile Assets Cover Once a project is complete, this cover protects against the loss of or inability to repatriate mobile assets (or profits) due to political risk. This cover is usually for movable equipment where the owner or lender would like to repossess and re-export the assets with the intention for the asset to leave the country once the contract is completed. This cover can also protect against de-registration Unfair Calling of Bonds This covers the unfair calling of bid bonds, advance payment bonds, performance bonds, warranty bonds, maintenance bonds, retention bonds or customs bonds etc., which are issued by a buyer or buyer's bank due to political events. This cover can safeguard advance payment bonds, performance bonds (offered only when the counter-party is a sovereign or sub-sovereign entity) and retention bonds, and can be used to complement single contract cover Foreign Direct Investment 17

26 This product protects investor or financiers against the loss of equity in a project due to confiscation or broad political force majeure. The Risks covered under this policy include: Inability to Transfer Dividends overseas in hard currency Inconvertibility of Local Currency deposited for transfer into hard currency Confiscation Expropriation Nationalization Deprivation Breach of Concession Rights Forced Abandonment Forced Divestiture Political Violence ATI can protect against a selection or all of these risks, any eligible cross border investment into one of its Member States through Foreign Direct Investment Insurance. When packaging these products ATI has the flexibility to provide a mixture of both PRI and CRI products that are more comprehensive. Examples of these are the Bankers All Risk Policy which provides aspects of both PRI and CRI. In providing these products ATI allows the clients to pick the appropriate cover(s) required so that the insured may decide to obtain one or more of these products. The insurance premium is determined by the nature of the risk, tenor or period of the cover, amount or value of the insurance and the specific country in which the insurance is being used amongst other considerations Commercial Risk Insurance Short-term Whole Turnover Credit Insurance (WTO-CRI) Typical payment terms under this policy are up to 12 months and can cover up to 90% of the invoice value of the goods. This coverage normally applies to all the insured buyers, where ATI insures the entire book of orders. Premium is calculated individually for each policy based on a number of factors including buyer risks, the countries involved and the spread of business Medium-to-long term single obligor credit insurance (MLT-CRI) This policy is normally purchased when repayment terms are between two and five years, but can also extend coverage to 10 years. Under this product, ATI covers up to 90% of commercial risks and 100% of political risks. Policies are written on a transaction-by-transaction or on a single obligor basis. 3.3 ATI s Current Product Range The main focus of Export Credit Agencies (ECAs) is to take political and commercial risks in support of exports or investments. The range of products offered by ATI in both the Political Risk Insurance and Credit Risk Insurance compares very favourably with other ECAs throughout the world. 18

27 While ATI s product range is appropriate for the area of activity it is targeting, there are a number of challenges ATI faces in terms of existing products being adopted by the market. Most notably, there is a need for visibility and education for the target market. Effectively the up-take of the products will be directly affected by the understanding and ability by users to leverage the products. Until the existing potential is established and, without a full-blown market assessment, it is difficult to justify that ATI develop new products. Instead, for the time being, ATI should focus its partnership for delivery through forming clear strategic relationships with: o Commercial and Regional Banks; o Insurance Companies and Brokers; o Investment and Export Promotion Agencies Commercial and Regional Banks as delivery channels Banks and other lending institutions can derive immediate benefits from ATI products due to the nature of the asset protection of their core business [lending]. In this respect ATI must generate a number of potential products that can be supported by the PRI / CRI off-the-shelf products on its product offering. The premise would be to establish how the banks / lending institutions can be able to structure properly products around the insurance Insurance Companies and Brokers The recent innovation of Political Violence, Terrorism and Sabotage has had a significant impact in ATI s bound policies in terms of volumes. This product, developed after the Kenyan Post Election Violence [PEV], is a cutting edge and market solution product for a real and possible politically volatile situation across ATI s member countries. It is in developing products that can augment and mitigate the investment climate well structured within the target market that will make significant in-roads going forward. A number of insurance companies notably UAP and APA are using this product to attract new business in the Region Investment and Export Promotion Agencies Visibility and up-take of ATI products will also be dependent on taking full advantage of the special relationship with Member States and their respective investment and export promotion agencies. Clear terms of partnerships with value added perspectives are key to positioning ATI as the preferred PRI / CRI provider in the Region with clear benefits for investors and exporters. ATI must position itself at the front-line of interface with these parties and must develop sector-wide access products that enable it tom make initial and potential contact with the target market. Products such as market intelligence information can be developed to become an income generating mechanism and form the basis for long term meaningful relationship. 19

28 4.0 ATI s Business Activities 4.1 Underwriting Transactions Undertaken Since Inception Since its inception ATI has issued some 157 policies in both PRI and CRI as at June Figure 11: Total Number of Policies Source: ATI [2010 covers first 6 months only] The graphical presentation evidences the growth of PRI in Terrorism and Sabotage reflecting a growing concern for the interruption and loss of assets as a result of post election violence in Kenya and elsewhere. It is also expected that a number of policies will be renewed in the course of As the business has grown ATI policies have shifted from demand driven agribusiness to more technology based ICT and Service driven policies. The sectoral spread also reflects a deepening relevance across the economies and is a reflection of the greater awareness of the use of ATI policies. Below are the spread by sector of policies issued by ATI: 20

29 Figure 12: Sectoral Distribution: ATI Policies Source: ATI As at 2006, Agribusiness had the highest number of policies bound PRI and CRI policies. The basket of sectors changed quite substantially in 2009 where ICT and Services [including finance and banking] were the anchor sectors for insurance. 4.2 Foundation: Rationale, Business Model ATI s business model changed significantly following approval by the World Bank on the ATI General Assembly recommendation which led to the key changes in The capital structure restricted the efficient and effective use of IDA resources. ATI had an open-ended capital structure which the Agency operates as a silo-system of underwriting capital contributed by each member state (generally through IDA credits) for the support of its own risks. This structure did not allow for risk pooling and diversification, and excluded any possibility of leveraging IDA (other than through co-insurance). It also constrained the amount of business ATI could underwrite for a particular country, without an increase of subscribed underwriting capital, as was the case in Burundi. The ATI General Assembly agreed to convert the current IDA-funded facilities granted by its member countries into pooled equity capital al for the Agency. As noted above, the increased capital, risk pooling and diversification now allows ATI to leverage its capital and reinsure retained risks, thus enabling a higher volume of policies to be issued with the same amount o f resources and optimizing the usage of IDA resources. The Product offering notably ATI was offering Political Risk Insurance a product that was growing in demand. However, the product offering demanded by the market was more toward a combination of credit risk insurance as well as PRI. A number of Private Risk Insurance companies were willing to partner with ATI in this respect, particularly Atradius. 21

30 ATI is growing aggressively and will continue to develop based on the Business Plan. A key growth area will be the partnership between ATI and Commercial Banks in the Region. The development of new and innovative products that address key risk areas in facilitating trade and investment will ensure its continued relevance. 4.3 Financials, Budgets and Business Plan As with any insurance, there is a law of large numbers that is a key driver of profitability. ATI has yet to reach a critical mass of business volume, particularly with CRI, which will allow the administrative costs to be covered through a wide base of business. The marginal cost of an additional policy is very small and ATI, because of its multilateral structure and early stage development, has an unusual cost structure as compared to its more well-established national Export Credit Agencies in Europe or North America. ATI has been in operation for nearly 10 years, but it is really over the last 3 to 4 years since the capital restructuring had taken place that it was able to ramp up its activity. Table 5 below shows ATI s income statement for the period , indicating the ramp-up of gross written premiums (GWP) by over 8 times in this 4 year period. With this increase, reinsurance premiums have also commensurately increased. Meanwhile, due to the economic downturn investment income shrunk between 2008 and 2009 by over 40%. Table 5: Income Statement Year Income Gross Written Premiums 3,614,707 1,917,125 1,065, ,258 Reinsurance Premiums Ceded (1,871,739) (899,631) (539,330) (140,941) Change in Provision for Unearned Premiums (504,745) (262,789) (312,437) 65,393 Net Earned Premiums 1,238, , , ,710 Commission Income 258, ,352 71,961 23,524 Investment Income 1,569,239 2,776,643 2,852,415 2,663,801 Other Operating Income 374, ,958 41,979 2,492 TOTAL INCOME 3,440,081 3,807,658 3,180,061 3,059,527 Expenses Claims Incurred Gross 6,142 13, ,971 - Reinsurers Share (3,685) (13,784) (137,971) - Net Claims Incurred 2, Acquisition Costs 51,567 56,328 26,792 Administrative Expenses 3,898,567 3,349,773 2,974,204 3,023,865 Foreign Exchange Loss 58,702 27,221 9,034 - Finance Costs 73, ,978 43,755 45,061 TOTAL EXPENSES 4,084,445 3,542,300 3,053,785 3,117,256 Net Income/(Loss) (644,364) 265, ,276 (57,729) Source: ATI Audited Annual Reports 2006 to 2009 Expenses have grown at a reasonable pace, relative to the growth of the business. The prudent management of costs is positive but must be realistic against the need for training and depth which will call for further expenditure and retention of experienced staff. 22

31 Two key measures in insurance are the Claims Ratio and the Combined Ratio. The claims ratio is defined as total net claims costs divided by total insurance revenues. The combined ratio is the sum of the claims plus expenses divided by insurance revenues. An average combined ratio of lesss than 100% is a sustainable business. ATI has not achieved a combined ratio of less than 100% on a year-on-year basis, so continues to rely on investment income. This is not unusual for a start-up insurer, but will require continued focus to keep costs in check, or find continued donor support to cover the additional costs related to its special status as a multilateral insurer. Figure 13: Expenses to Income Source: ATI P& L An increase in income and a diversification strategy is in place as expressed in both the Mandate as well the Business Plan which notes that ATI will be pursuing a more aggressive approach in increasing its income generating products. It is noted that this structure of profit to expenses ratio is reasonable for an institution at the growth stage of ATI. Table 6: ATI Sources of Business ATI Sources of Business USD Millions 2012e 2011e 2010e 2009a 2008a 2 Investment Insurance N/A N/A N/A Credit Insurance N/A N/A N/A Gross Exposure Volume Net Exposure Volume Total Shareholders Fu Required Capital Per Formula Capital Margin % Source: S&P / ATI unds a

32 The margin in excess of the Required Capital is receding but may actually rise as new capital is introduced by the joining of new Member States. ATI s Balance Sheet reveals a strong and resilient asset base and is under no threat in terms of its ability to meet its obligations which in part also contributed to its strong A rating by Standard and Poor s. Table 7: ATI Balance Sheet Year ASSETS Cash and Bank Balances 5,827,587 4,199,895 2,030,306 1,877,834 ATI Bank Accounts 91,872,725 79,839,897 7,776,306 - Security Trust Accounts 4,650,000 6,582,828 51,244,463 51,244,463 Insurance Balances Receivable 1,194, , , ,286 Reinsurance Balances Receivable 136,687 56,561 66,066 35,571 Other Receivables and Prepayments 532, , , ,462 Reinsurer s Share of the Claims Reserve 54,556 50,871 73,112 - Reinsurer s Share of Unearned Premium 998, , ,597 - Deferred Acquisition Costs 19,877 22,010 30,279 4,883 Property and Equipment 266, ,941 61,876 42,923 Intangible Assets 28,232 22,532 16,293 19, ,581,436 92,641,988 62,728,595 53,565,678 LIABILITIES Insurance Balances Payable 745, , , ,090 Reinsurance Balances Payable 212, , , ,283 Other Payables and Accrued Expenses 461, , , ,770 Claims Reserve 57,014 50,871 73,112 - Unearned Premiums 1,980,974 1,018, ,676 29,701 Unearned Ceding Commissions 117,569 57,056 72,318 29,289 Unearned Grant Income 0 70, IDA - Development Credit 9,896,393 7,866,260 5,642,058 5,310,422 13,471,443 9,987,631 7,359,889 6,099,555 SHAREHOLDERS EQUITY Share Capital 96,100,000 86,000,000 46,000,000 1,300,000 Share Premium Account 441, , ,762 - General Reserve 250, , , ,000 Underwriting Capital 900, ,000 14,161,007 51,244,463 Retained Earnings -5,581,069-4,936,705-5,202,063-5,328,339 92,109,993 82,654,357 55,368,706 47,466, ,581,436 92,641,988 62,728,595 53,565,679 Source: ATI Audited Annual Reports 2006 to

33 Figure 14: Liabilities to Assets Source: ATI Audited Balance Sheets Figure 15: Growth in Share Capital - Figures in US$ Source: ATI Balance Sheets The Share Capital is set to increasee with the declared interest and preliminary signing of a number of West African Countries and the continued World Bank / IDA support that facilitates the availability of funds for the countries that meet the required pre-disbursement criteria. Under its own self regulation and best market practices ATI requires a very high Minimum Required Capital due to the nature of its business in which it must be able to demonstrate that it can meet its obligations as they fall due. Presently the Required Capital is placed at: [43% X Net Exposure] + [4% X Gross Reinsured Exposure] 25

34 This high Capital Adequacy places some growth constraints on ATI for risk appetite and therefore the very aggressive strategy in recruiting new Member States in the short term. A major strength that has been achieved by ATI is the Long Term Rating of A from Standard & Poor s Rating for 2009, a rating that has remained consistent for the last 3 years. S & P s rating is based on three main parameters i) Very strong and sound capitalization, ii) Strong financial flexibility and iii) strong liquidity. Table 8: Long Term Rating Rating Agency Rating Outlook Date S & P A Renewed at the same level as at 2009 Stable Long Term 12 th August 2010 S & P A Renewed at the same level as at 2010 Stable Long Term 23 rd June 2009 S & P A Very strong capitalization & Strong Stable Long Term 17 th April 2008 Investment & Liquidity Source: S & P Rating of ATI 5.0 Stakeholder Feedback 5.1 Introduction In order to assess the impact of ATI, stakeholder feedback was required to provide on-the-ground input. Feedback was collected via a number of methods, including face-to-face meetings, /on-line surveys and telephone interviews. 5.2 Face to Face Meetings The Consultants were able to meet over 36 persons and institutions. These meetings were further augmented by the On-line Survey and Requests that also provided a profile of responses that has given this report the basis of assessing ATI s overall impact. The Survey Phase of the IA was based on the need to establish the Markets perception and experience with ATI since inception. Annex C provides detailed interview summary for the stakeholders met. 26

35 Figure 16: Face to Face Meetings Statistical Representation of Respondents Meetings were organized between the Consultants and target persons by ATI. It was anticipated that the participants should be drawn out in order to form a broad stakeholder prism that would be able to capture different issues in this report. The Respondents provided non-formatted data that can broadly be accounted for as follows: Whether ATI products have increased the Companies turnover; Whether ATI products have enabled the Company to enter into new markets; Whether ATI products have enabled users to increase employment / job opportunities; Whether ATI products have facilitated South / South Trade; Whether without ATI products the transaction [additional credit / incremental exports] would not have taken place; Whether ATI is meeting the expected objectives [stakeholders]. This section documents each parameter and variable found in its approach on a Country by Country basis. 27

36 5.2.1 Kenya Interview Results Our meetings were undertaken amongst clients [practitioners exporters / investors / insurance companies] who interface with ATI as the insured or as the beneficiaries of insurance products [such as banks]. Figure 17: Percentage of Total Interviews in Kenya We found that of the practitioners / users of ATI products: That 90% of the users felt that ATI delivered timely and Box 1: A Kenyan Horticultural professional services; Exporting Company reported That 100% of the transactions added value to the that ATI PRI / CRI products had operations of the users by supporting additional credit, helped the company to double exports and overall turnover and profitability; turnover and increase That the Government and Public Institutions all profitability. It had increased recognised the importance of ATI in contributing to the its work force by nearly a third investment and trade environment in Kenya and the including the hiring of highly Region. skilled personnel that were now on board in order to meet The main developmental impact that is noted in Kenya is as the demand of growing sophistication in the buyer follows: market. A default by a German buyer covered under the CRI Job and employment creation as a result of transactions was promptly paid by ATI. supported by ATI; Increased exports into a wider number of countries both North-South as well as South-South trade; Support of FDI both into Kenya as well as from Kenya to other countries. 28

37 Of the 157 policies bound by the end of June 2010, Kenya had 78 bound policies accounting for 49.7% of the total policies bound. With the appetite for PRI [Terrorism & Sabotage] increasing with the prospect of change in the Constitution [promulgation was effected on 27 th August 2010] and with elections coming up in 2012 Kenya is likely to see a high increase in the demand for PRI products. The main concerns raised by Kenyan public stakeholders were the functional inter-face that links investor and export Centers with ATI in terms of expertise and fee share management. These matters are being addressed and once resolved could lead to higher volumes both for ATI as a provider of PRI as well as for Kenya in terms of higher FDI and exports arising from the use of these products Uganda Interview Results The Consultants met with both practitioners and stakeholders mainly representing Government of Uganda interests as well as insurance and exporters associations. Figure 18: Percentage of Total Interviews in Uganda The Consultant met with key players within the private sector including Commercial Banks. Uganda has enjoyed 8.28% of the total policies bound by ATI. The IA is able to identify the following conclusive outcomes: Those institutions that already enjoyed ATI product support were entirely satisfied that the risks covered under the products were sufficiently covered. Notably Commercial Banks already had feedback from the Bank of Ugandaa that ATI products was sufficient security against which lenders could make relative risk mitigation. Efforts to enter into partnerships with Insurance Companies were on going. However there was a low up-take of insurance products generally due to historical reasons. This hampered the depth and value in insurance products generally. Box 2: A Regional Insurance Company was one of the early takers of ATI s Political Violence, Terrorism & Sabotage PRI facility. This cutting edge product provides Political Risk Cover for events [of a political nature] that causes damage or interruption of business on short term events. The cover has had an impact of some 2% in underwriting income to their books. 29

38 A major concern in the financial market was the relatively low understanding of ATI s role and range of products. Notably banks which form the anchor partnership with ATI have not been able to fully understand how to work with ATI. This concern is being addressed Rwanda Interview Results The Consultants undertook meetings with Practitioners and Public Sector Stakeholders to determine the Impact of ATI in Rwanda. The interactions were similar to our experiences in Kenya and Uganda. Pointedly the practitioners and users were very enthused by the products. Figure 19: Percentage of Total Interviews in Rwanda Rwanda has enjoyed 2 policies bound [accounting for slightly less than 2% of the total portfolio since inception as at 2009]. The policies have been issued to a leading Regional Commercial Bank to enable its cross border Head Office to lend in support of the local branch which has capital limitations. The users and beneficiaries of the ATI products have been able to accesss bank financing and will have significant impact on the expansion of the CIMERWA cement plant in Rwanda. The Rwanda construction sector has grown by over 351% over the 2003 to 2008 period alone 8. The impact on the construction industry itself will be significant and will lead to shorter delivery times for cement and will also have significant developmental impact on job creation, poverty alleviation, foreign exchange savings and export earnings. support Concerns were raised as to the low number of policies bound raised mainly by public stakeholders. This concern Box 3: The Rwandaa Construction industry is one of most significant contributor to the growth in GDP estimated to have grown by 351% between 2003 and CIMERWA is a key player in the construction industry and supports the sector in Burundi and Eastern DRC in addition to Rwanda. ATI provided KCB a Regional Commercial Bank with a PRI L policy for the expansion project of CIMERWA worth over US$ 55 Million [ATI has retained US$ 7.5 Million]. The developmental impact is expected to be significant leading to job creation, poverty alleviation, foreign exchange savings to name a few. 8 Rwanda Development Board website. 30

39 was also linked to the low visibility / low public knowledge of ATI and its products. This lack of knowledge of products is a concern that is now firmly on the radar of ATI. Anchor partners such as Investment and Export Centers are key in driving ATI products in the Region and therefore sufficient resources in training, seminars and frequent correspondence with these institutions is key going forward. There is a need to clarify the role of ATI as a PRI provider and further that PRI s do not magnify the risks but rather they provide mitigation. It is evident that the demand side Insurance will be driven by higher understanding of ATI products and will be a direct result of investment in training. Practitioners are very satisfied with ATI products and have not raised any fundamental issues as such Zambia Interview Results Zambia accounts for 5.1% of the total book of bound policies from inception to the end of The Consultants also undertook a wide range assessment of the ATI impact in Zambia by consulting private sector users and beneficiaries as well as public sector actors as stakeholders and shareholders. Figure 20: Percentage of Total Interviews in Zambia Zambia presented the best case in understanding the limitation of PRI and CRI product up-take. A land locked country facing serious challenges of reaching its target export countries Zambia is in a paradoxical position of having some of the finest agriculturally friendly land and climate having to contend with high cost of delivery due to freight costs as well as other attendant issues. The Consultants came face to face with the challenges of the floriculture and horticulture industry. The high fixed costs of production in local currency and the exposure to the forex risk [value of exports paid in USD which weakened against the Kwacha during period spelt doom for the exporters given that they were receiving less kwacha. The market for CRI was therefore hampered by the additional cost, rendering. Box 4: A leading vehicle manufacturer operating a hub for the region in Zambia was an example of South South trade enhanced by ATI - PRI products. Exporting to its subsidiary in Malawi the company insured against currency inconvertibility risk. In another example the most successful and advanced horticultural and floricultural venture in Zambia also linked by shares to a strong exporting concern in Kenya. These two offer clear examples of how in part ATI has enhanced South South Trade. 31

40 5.3 and On-line Survey An and on-line survey was conducted with customers between June 30 th and July 23 rd, Responses were received from 20 entities [about 40% response], which is considered an adequate representation. However, of the responses received, one-third of the respondents reported that they were not ATI customers but rather insurance brokers selling ATI products. A series of 6 Impact Statements were made and respondents were asked to evaluate the statements. Impact 1: Growth of Business Because of ATI, your business has grown. Reported Growth 29% Reported No Growth 50% No Answer 21% Of the respondents, nearly 30% reported growth in their business because of ATI. Growth of the business could be directly attributable to having ATI products which either helped them take on new clients in new markets and access additional capital from the banks. Impact 2: New Customers Because of ATI, your business gained new customers. Gained New Customers 33% No New Customers 47% No Answer 20% One-third of respondents reported new customers because of ATI. Of the businesses reporting new customers, only one reported more than one new customer. Impact 3: New markets Because of ATI, your business was able to expand into new markets. New Markets 21% No New Markets 57% No Answer 21% More than 20% of survey respondents indicated they have been able to expand into new markets and accept new clients, based on ATI s credit approvals. This corroborates the interviews in which clients spoke about ATI approving credit limits on new clients, thus giving them confidence to ship their products. 32

41 Impact 4: Additional Staff Because of ATI, your business was able to hire new staff. New Staff 7% No New Staff 71% No Answer 21% A not insignificant number of respondents (7%) indicated that because of ATI s support they were able to hire new staff. Impact 5: Access to Additional Capital Because of ATI, your bank increased your line of credit. Credit Increase 43% No Credit Increase 36% No Answer 21% Nearly half of the people surveyed indicated that ATI s insurance policy helped increase their line of credit with their bank. Over half of the customers reporting an increase in credit line had their lines of credit increased by 200% or more. Whether the bank accepted the policy as collateral, or simply the bank became more comfortable with the balance sheet of the client was not clear. Impact 6: Loss Avoidance Because of ATI, you have avoided losses from delinquent buyers. Loss Avoided 0% Loss Not Avoided 0% No losses to Report 71% In Process 7% No Answer 21% One customer reported that utilizing ATI had enabled them to identify problem buyers before the transaction. Another reported a claim filed in December 2009 but as of August 2010, that claim had not been resolved. The claim made may have been unsubstantiated and it would appear that the client had not pursued this matter after making an initial claim. Management is looking into this to establish the circumstances under which this was unresolved. Additional direct comments provided by respondents to and online surveys for ATI are provided in Annex D. 33

42 6.0 Impact Assessment 6.1 Introduction of Impact Assessment Impact Assessment is important as a tool in any development institution operating in a domain which has private sector counterparts that the agency defines not only financial sustainability, but also development impact. This is core to its mandate. In the case of ATI, trade and investment insurance is designed to facilitate greater trade and investment within Africa. Development Impact as a concept can be considered as follows: Input Output Outcome Impact The inputs into ATI (such as capital, expertise, IT, partnerships) create an output (i.e. insurance products and greater awareness and improved perception of risks). The outcome of insured transactions and greater risk awareness creates impact on the real economy such as more sales, more exports, etc. Impact happens at the direct level as well as indirect. For example, direct benefits at the level of the corporate customer could mean: Increase of financial profitability Increase in market share and improvement of strategic position New buyers New markets Increase of employment These impacts lead to more macroeconomic impacts such as: Increased paid taxes Increased contribution of a country s GDP growth Increased financial deepening. Indirect impacts are those multiplier effects which occur because more jobs are created by the entity which then cascades down into the economy. This report focuses on the direct impacts of ATI by identifying key indicators of positive and negative impact and assessing these against baseline values. 6.2 How Impact is Measured Measuring impact requires both qualitative and quantitative inputs. These inputs are obtained from the multiple lines of evidence in order to generate an overall scoring. The multiple lines of evidence from surveys, customer and stakeholder interviews, background research and interviews with staff and management provide a holistic picture of performance and a basis on which impact can be evaluated. 34

43 Apart from quantitative and qualitative indicators of impact, it is also important in an impact assessment to derive an evaluation from both a top-down macro perspective as well as a bottom-up approach based on individual transactions and customers. The top down approach would look like: ATI did x amount of business and served y customers and therefore its impact is z. The challenge with this is to determine whether the business would have been without ATI, i.e. whether ATI was additional or incremental. This means being able to determine whether exports would not have happened or investment would not happened but for ATI, or would have happened but on terms less favourable. It is the case that trade and investment in Africa grew substantially since ATI s inception, but how much can be attributed to ATI? The bottom-up approach takes individual experiences from customers answering the question: because of ATI, my business grew by x%. Because of the limitations of sample size, the challenge is to extrapolate across the whole portfolio. Based on the assessment made by drawing in the evidence, a Rating is then assigned to each dimension of Impact. The Rating Index that is used for this assessment is as follows: Excellent Good Satisfactory Marginal Unsatisfactory. 6.3 Dimensions of Impact This assessment measures impact across a range of dimensions. Table 7 below defines the Impact dimensions being assessed and the measurement parameters used to assess these. Table 9: Impact Parameters Impact dimension Description Relevance The extent to which ATI has met the industry s needs in member countries as per its mandate. Also, how its relevance may have changed in relation to changes in the economic landscape of African member countries. Parameters Appropriateness of mandate to changing industry needs Relevance in all member countries Relevance relative to other sources of insurance in terms of additionality Efficacy Efficiency How successful ATI s operations have been in identifying and meeting the strategic objectives identified in policy documentation and/or conceptual framework as applicable. Efficiency of ATI s operations including cost management, profitability and financial sustainability. Review of ATI s operational performance against strategic and business plans Review of ATI s financial performance 35

44 Impact on regional trade and risk perception "Value for money" of ATI for member states Development of partnerships and capacity building The extent to which ATI has led to increased regional trade and how Governments and the private sector have generally responded to the role played by ATI to facilitate regional trade, e.g. if investments took place or were less costly as a direct result of ATI s involvement. For example, would the trade or investment opportunity still have taken place without ATI s products; would it have been more expensive? If so, by how much? Moreover, the extent to which ATI has had a demonstration effect by adjusting the perception of risk in the region. The extent to which the creation of ATI has given its member states value for money through its facilitation of trade and investment in Africa. The extent to which ATI has engaged in or developed partnerships with other networks that support trade and investment in Africa. Increase in trade and investment which can be attributed to ATI Reduction in costs because of ATI Demonstration effect, leading other insurers into the market Response by governments and private sector to role played by ATI Facilitation of incremental trade and investment Positive economic impact, e.g. o Job creation o Transfer of technology; o Incremental availability of Bank and Financial Services funding; o Incremental exports and sales to new and existing markets; o Import substitution and foreign exchange earnings; o South/South collaboration Positive social impact Engaging in or developing partnerships with agencies and networks to help facilitate trade and investment in Africa Relevance The concept of Relevance is the extent to which ATI has met the industry s needs in member countries as per its mandate and as the economic landscape of African member countries has changed. 36

45 The OECD DAC Criteria for evaluating Development Assistance 9 defines Relevance as: The extent to which the aid activity is suited to the priorities and policies of the target group, recipient and donor. DAC also provides guidance over key considerations when rating relevance. DAC goes on to recommend that Relevance is considered against: are the objectives of the program still valid; are the activities and outputs of the program consistent with the overall goal and the attainment of its objectives; are the activities and outputs of the program consistent with the intended impacts and effects. For ATI, this means the extent to which ATI has met the industry s needs in member countries as per its mandate. Also, how its relevance may have changed in relation to changes in the economic landscape of African member countries. It is useful to consider Relevance against several phases in the evolution of ATI. At establishment, ATI had 7 member countries. Within its founding documentation the mandate was to provide Political Risk Insurance to support trade and investment in Africa. In the second phase with the capital restructuring, ATI was better able to execute its mandate by having the appropriate flexibility and better reach. The mandate and mission statement have changed to include both Political and Commercial Risk Insurance, while the number of member countries has expanded. ATI has been very responsive to the needs of the industry, as demonstrated by the introduction of Political Violence Terrorism and Sabotage insurance as a specific cover under the PRI policy. The take-up of this product has been significant, reflecting in large part the latent demand which existed in Kenya after the elections. As is discussed in Section 4, ATI has been proactive in extending this product into other member countries and helping to catalyze demand. Similarly, demand for credit insurance has grown, as evidenced by the increase in policies across a range of sectors. The dominance of Kenya is not surprising and means that Relevance is particularly high in that market. Based on interviews and direct comments from surveys, ATI s relevance in the CRI field is extremely high. Few alternatives existed in the market for risk cover for African risk. In particular the credit risk insurance product being offered in member countries is always incremental or additional in the absence of a local/national ECA. For investment insurance, ATI is seen to be a source of useful capacity and has a halo effect for member countries by virtue of the inherent political risk mitigant ownership confers. Rating of Relevance (Excellent) At inception, ATI was characterized by limited objectives and scope of operations. The assessment therefore concludes that, at inception, Relevance could be rated as Good given the operational limitations. However, over time, increased flexibility points to a Relevance rating of Excellent. This will remain so in the foreseeable future as membership expands, supporting additional trade corridors, and as awareness of the products increase, there will be greater demand for ATI s products Efficacy

46 Efficacy looks at how successful ATI s operations have been in identifying and meeting the strategic objectives identified in policy documentation and/or conceptual framework. To assess efficacy, this requires a review of ATI s operational performance against strategic and business plans. In its mandate, ATI is clearly directed to deliver certain types of activities in order to meet its objectives. The Purpose and Object of the Agency [ATI] is to provide, facilitate and encourage and otherwise provide the provision of, or the support for insurance, including coinsurance and reinsurance, including the issuance of guarantees and other insurance and other financial instruments and services, for purposes of trade and investment and other productive activities in African State in supplement to those that may be offered by the Public or Private sector, or in cooperation with the public or private sector. This captures the clearly identified areas and activities envisaged by the founders. ATI presently issues both Political and Commercial Risk Insurance as insurer, co-insurer and reinsure. ATI s strategic planning process has been well-defined and executed. Annual operating plans establish targets and establishment of balanced business scorecard to measure performance against targets. Figure 21: Balanced Business Scorecard (BBSC) Draft CEO Balanced Business Scorecard FY10 Financial Perspective Q1 Q2 Q3 Q4 Gross Written Premium (GWP) Net Earned Premium (NEP) Claims net of Recoveries Operating Expenses Business Process Perspective Q1 Q2 Q3 Q4 Three Year Business Plan, Annual Budget, Business Scorecard Develop and Implement Whole Turnover Credit Insurance Underwriting System Representative offices to be staffed and fully functioning with the HCA in place Business Continuity Plan Internal Audit Function Internal Legal Function Risk and Claims Department Quarterly Board Reports Vision & Strategy Customer Perspective Q1 Q2 Q3 Q4 Existing member capital increase/membership completion: Capital increase for DRC & Ghana New member applications for African States: Benin; Burkina Faso; Cameroon; Nigeria; Senegal; Comores; Cote d Ivoire; Mauritius; Mauritania; Zimbabwe (10) New member applications for non- African States: AfDB (1) Capital subscription; DRC; Liberia; Ghana; Nigeria; Benin; Burkina Faso; Cameroon; Nigeria; Senegal; AfDB (9) Customer Satisfaction Survey Learning & Growth Perspective Q1 Q2 Q3 Q4 Personal Performance Management System Personal Training Plans (PTP) Succession Plan (SP) Develop & Implement new staff manual with associated HR policies & procedures and Incentive Plan Staff Turn over Staff Survey Induction curriculum for Directors Key Blue - Excellent Green - Good Yellow - Fair Orange - Poor Red - Demands Urgent Attention Black - Not yet applicable The BBSC sets targets which, if achieved, would result in meeting the objectives of the organization. Annex E provides the details of how performance is measured against the main Key Result Areas (KRA s). 38

47 Rating of Efficacy (Excellent) In terms of efficacy ATI would be rated Excellent based on a comprehensive and effective planning and performance management system Efficiency Measuring ATI in terms of how efficiently it has utilized its assets toward meeting its objectives is key. Inefficiencies could lead to a risk to sustainability in the long run. It will also help Management and Board understand any leakage to the operations. Efficiency is measured by reviewing the financial performance of ATI s operations including cost management, profitability and financial sustainability. The level of profitability has been low and as measured by its combined ratio has not yet reached a sustainable level. However, it is noteworthy that this is fairly consistent with an organization at the growth cycle and age of ATI. Rating of Efficiency (Satisfactory) In rating the efficiency one recognizes the developmental growth curve in which ATI is operating. The overall financial performance has been acceptable given ATI s level of maturity but could have potentially been even better if capital restructuring had been in place earlier and ATI had reached a level of critical mass in its business volumes. The evaluation is that ATI scores a Satisfactory with the expectation that this can and will improve as business activity increases Impact on Regional Trade and Risk Perception Fundamental to optimizing ATI s development impact is assessing the extent to which ATI has led to increased regional trade and investment. The main sources of evidence for this impact dimension are the interviews and surveys in order to attribute growth in African trade and investment to ATI. These clearly indicated that ATI had a positive and potentially significant impact when its products were being used. What is clear from stakeholders is that ATI s impact could be much larger, if awareness and product knowledge were to increase. While some stakeholders complained about pricing for ATI s products, this is neither surprising nor worrisome, as ATI in many instances is a price-taker and prices for risks it assumes. The question of whether the trade or investment opportunity would still take place without ATI is a more difficult one to answer. Certainly, CRI is a facilitation tool which is responsive to clients export business activities. Sharing the risk with the client helps not only understand the risk they are taking, but offers protection of their balance sheet and enables them to expand. In some instances, ATI will reject a particular buyer but it may be the case that the client decides to self-insure. ATI s value is in providing not only insurance, but also information about buyers which allows clients to decide themselves whether or not to insure. For some of the big global players in the credit insurance market, these credit decisions are often sold as a stand-alone product. Given the scarcity of competition within Africa for CRI, there is little or no demonstration effect, leading others into the market. However, for the PRI product, it is arguable that ATI has a more significant role. 39

48 While there remains significant capacity in theory for PRI in the region, particularly in support of large infrastructure projects, ATI with its shareholding structure which deters member governments from interference in projects, triggering a claim, can help improve the risk profile in a project for other insurers. Notably many of the participating Members quote the existing Participation Agreements in both ATI and MIGA as a key mitigant on trade and investment risks in doing business in these countries. Africa remains a predominantly high risk area compared to the rest of the world (see Figure xx below). ATI s presence in the Region may not have necessarily reduced the risk perception per se. However, its existence has provided investors and traders additional options in mitigating the overall risk profile. It is noted that the participating governments of Member Countries enjoy varying degrees of benefits by the association and participation in ATI and other Risk Insurance Agencies including MIGA. Figure 22: Political Risk Map Source: AON - Website Rating for Impact (Good) The overall impact that ATI has had in the Region is Good from a qualitative perspective. Recognising that the ATI business model presently in place was launched in 2006, it has been effectively been in business for only 3 and a half years of its 10 year existence and there is much more than can be done. ATI has had a very positive impact through the provision of PRI and CRI products in the Region Value for Money of ATI for Member States The creation of ATI was intended to give its member states value for money through its facilitation of trade and investment in Africa. 40