Export Credit Guarantees of the Federal Republic of Germany. Hermes Cover. Annual Report

Transcription

1 Export Credit Guarantees of the Federal Republic of Germany Hermes Cover Annual Report 2004

2 Federal export guarantees at a glance 2002 Values in millions EUR 2003 Values in millions EUR 2004 Values in millions EUR Statutory maximum exposure limit Cover applications (number) of which for SMEs in % 1) Covered export volume of which for developing countries in % Central and Eastern Europe in % Western industrial countries in % Covered volume as % of total exports Premiums Recoveries 2) Political risk claims Commercial risk claims Claims paid 3) Political risk claims Commercial risk claims Exchange rate risk claims Management fee Annual financial result Deficit accrued 4) Amounts subrogated to Federal Government 5) 117, , ,000 27,262 29,659 27, ,434 15,989 21, , , , , , , , ) Employees with up to 500 2) On political and commercial claims and rescheduling agreements 3) Includes claims under political, commercial and exchange rate risk 4) The annual deficits from 1983 till 1988 accumulated to 13,517m EUR as per ; since 1999 accrued deficit has been progressively reduced by the annual surpluses 5) (under claims paid/rescheduling agreements), the recoveries expected under these will be transferred to the Federal Budget Accounts

3 Export Credit Guarantees of the Federal Republic of Germany Hermes Cover Annual Report 2004

4 Message from Wolfgang Clement Wolfgang Clement, Federal Minister for Economics and Labour 2004 was an excellent year for the Federal export credit guarantee scheme. A new record was established with 21.1 billion EUR in cover granted for exports during the year. At the same time a record surplus was generated, so that the reduction of the deficit run up during the Eighties and early Nineties is proceeding apace. This positive development is due to a number of factors: I would like to stress that this instrument for the promotion of exports is rigorously focussed on the needs of German exporters, who play an extremely important role as a macroeconomic factor and in creating jobs, more so even than in other countries. The high proportion of small and medium-sized enterprises involved in export who are world-beaters in many sectors and the excellent bandwidth of products manufactured for export are a crucial element of Germany s economic strength. Our export credit guarantees take full account of this and thus are able to stand at the companies side effectively in the international competitive arena. Customer focus is the priority here. The responsible ministries and the consortium operating under the Federal mandate Euler Hermes Kreditversicherungs-AG as lead partner and PricewaterhouseCoopers AG define themselves, today more than ever before, as service providers acting in the interests of Germany by safeguarding jobs and promoting the reputation of Germany as an industrial location, and by actively supporting exporters. The primary focus here is on the special needs of small and medium-sized exporting companies. Reliability and flexibility in processing cover applications combined with fast decisions are high on the agenda. It is therefore gratifying to see that the customer satisfaction survey carried out in 2004 concluded that the export credit guarantee scheme is regarded in a very positive light. The German scheme also gets very good marks in comparison with other ECAs. We set great store by an intensive dialogue with our policyholders. The dialogue event held on 18 th May 2004 at the Federal Ministry for Economics and Labour is just one example of the ongoing exchange of information and the discussions which we carry on concerning new developments and needs in the Federal export credit guarantees. A detailed account of this can be found in this annual report. 4

5 A very important factor for German exporting industry is the fact that we have moved onto the offensive in our response to the shift observable over recent years from political to commercial risks. It has meanwhile become standard practice to assume Hermes cover on the basis of bank guarantees or corporate risk, since state guarantees are in most cases no longer forthcoming, even in the former state-run economies. The best example of this is Russia, where guarantees from more than 40 commercial banks are already accepted by us as security. The evaluation and management of commercial risks in cooperation with the policyholders is of strategic importance, since we want to be able to uphold an optimal range of cover options in a changing economic environment while at the same time acting in compliance with the budgetary rule that a risk must be justifiable. As one of the world s main industrial and exporting nations, Germany needs a strong, flexible export credit guarantee scheme in tune with our needs. Our export credit guarantees are available to German exporters today in all the principal growth markets. It is my hope, in view of its importance for jobs and Germany s manufacturing base, that demand will continue at the present high level. It is worthwhile taking a short look back: it proved possible over the last few years to reopen cover on many important markets, including as reflected in the current figures of guarantees granted such important countries for German exporters as Russia and Iran. This was preceded in each case by the regulation of remaining old debt, such as the arrangement reached with Libya in We hope in the current year to be able to improve the cover options for a number of key countries, so as to also contribute to their economic development. A particular focus of attention is of course Iraq, where we are closely following the ongoing, unfortunately very difficult situation. The regulation of Argentina s Paris Club debts would also be an important step forward in enabling cover to be given again on public sector buyers there. We have already been able to reopen a substantial amount of cover on private sector business under a cover ceiling. 5

6 Contents 8 Business overview The Interministral Committee 12 A Dialogue with Exporters 12 Dialogue event on in Berlin 14 Tapping export potential in growth markets 15 Liquidity for small and medium-sized enterprises 15 Foreign content and local costs 16 The environment exports with a social conscience 17 Multi-sourcing 18 Conference New challenges in commercial risk on in Berlin 19 Conference Claims and recoveries on in Hamburg 20 Small and Medium-Sized Enterprises 21 The promotion of renewables energies 22 An exchange of views on environmental issues 22 Important innovations and issues 22 Protracted Default is insured as a standard 23 Marketable risks 25 Credit line facility cover now available to commercial banks 25 Cover can also be denominated in local currency 26 Receivables for additional work under constructional works transactions 27 Buyer surcharge for commercial risks in countries with premium Category 1 28 Environmental aspects 28 Transparency 29 Customer satisfaction study 31 Special forms of cover 31 Project financing and structured finance 35 Aircraft business 37 International cooperation in aircraft business 38 Shipping business 39 Country cover policy 40 CIS countries, Central and Eastern European countries and South Eastern Europe 41 CIS countries 45 Central and Eastern European countries 45 South Eastern Europe 46 Africa 49 Latin America and the Caribbean 53 Asia 58 The Middle East 6

7 62 International Cooperation 62 Developments in the OECD 64 European Union 65 Berne Union 67 Cooperation with credit insurers in other countries 70 Development of export credit guarantees 70 Cover for new business 72 Breakdown of newly covered business by country groups 74 Breakdown by horizon of risk and type of cover 77 Number/volume of applications, types of goods covered 78 Claims and recoveries, rescheduling 78 Claims payments 80 Recoveries 81 Rescheduling 82 Iraq 82 The effects of the tsunami disaster in South Asia Russian Federation the ARIES transaction Russian Federation early repayments 83 Argentina 84 Rescheduling agreements 85 The HIPC initiative 86 Profit and loss account 86 Revenues 87 Expenses 87 Financial result 88 Export Guaratee Portfolio 88 Statutory cover limit, total commitment level and total outstanding risk 90 Regional distribution of outstanding risk 90 Funds earmarked for export credit guarantees at year-end 91 Unrecovered claims 92 Annex 7

8 Business overview 2004 Business Overview 2004 In the year just ended, the Federal Government assumed new export credit cover to the tune of 21.1 billion EUR. This marks the highest volume of cover ever so far in the 55-year history of the Hermes guarantees. The rise of 31.8 % over the previous year is due to the increased demand for export credit guarantees in particular in the Top Ten countries, those with the highest levels of new cover. The surge in export credit cover profited from the strong upturn in worldwide trading flows and even exceeded the record result in overall export growth (10.9 %). 8

9 The export credit guarantees granted by the Federal Government are a central instrument for the promotion of foreign trade and strengthen the position of German exporters in their international competition for business. They are especially important for German exports to markets beset with risks, where no cover is available from private insurers. A good 95 % of export credit guarantees regularly go to support deliveries or projects in the threshold, developing or transition countries. As in previous years, the main countries here are China, Iran, Turkey, Russia and Brazil, which have topped the list of the most important markets for Hermes cover for several years now. Hermes guarantees play a relatively insignificant role in exports to the industrialized world, which is the recipient of the vast majority of German exports. Several large shipping transactions contributed significantly to the rise in the share of cover for the industrialized countries to 7.5 % % of the export credit guarantees were accounted for by the countries of Central and Eastern Europe, including Russia and the CIS. Cover for exports to the developing and threshold countries, at 75.8 %, once again accounted for the lion s share, while export credit guarantees for the Asian developing countries, fuelled by the demand in China, rose by 58 %. In terms of the financial result, too, 2004 was a record year: the previous year s surplus, the highest to date, was once again exceeded. With 878 million EUR, the federal budget accounts posted a positive result from the scheme for the sixth consecutive year. The surplus, which is due in large measure to the recoveries under rescheduling agreements, reduced the historically accrued deficit of the scheme. Against the background of expected early repayment of rescheduled debt by major debtor countries such as Russia and Poland, there is every prospect of further large surpluses in the future was a year of intensive dialogue between the Federal Government and exporters. Decisive criteria for the successful development of the export credit guarantee scheme are flexibility and adaptability in dealing with changing markets and economic environments. In order to provide the optimum in support for exporters, the Federal Government and the mandatary consortium have intensified their contacts and their direct exchange of information and further expanded their range of consultancy services for exporting companies. A breakdown of the cover portfolio by horizon of risk reveals an increase in medium- and longterm business of 51.5 % to just under 7.7 billion EUR. Short-term business rose by 22.6 % to 13.5 billion EUR. Wholeturnover policies went up from last year s already high level by 10.6 % to reach a new figure of 8.7 billion EUR. Short-term specific cover has more than doubled in comparison with the previous year to 4.2 billion EUR. This is a significant indicator for a trend which was already becoming apparent last year: many capital goods exports are financed on short payment terms, although they would have been eligible for longer credit periods. This is especially the case with exports to China. 9

10 The Interministerial Committee The Interministerial Committee The Interministerial Committee (IMC) for the export guarantees of the Federal Government, chaired by the Federal Ministry of Economics and Labour, examines all major applications and decides whether to grant cover. It also debates basic policy issues and is responsible for the modernisation of the export credit guarantees and the formulation of cover policy, which sets out the scope and conditions of cover. The Federal Government has mandated the administration and handling of the export credit guarantee scheme to a private consortium with 10

11 Composition of the Interministerial Committee IMC BMWA BMF AA BMZ Federal Ministry of Economics and Labour lead function Federal Ministry of Finance Federal Ministry for Foreign Affairs Federal Ministry for Economic Cooperation and Development Mandatary consortium Euler Hermes Kreditversicherungs-AG Pricewaterhouse- Coopers AG Experts representatives of exporting industry and the banking sector KfW banking group AKA Ausfuhrkredit-Gesellschaft mbh Federal Audit Office Following the expansion of the Israeli port of Hayovel in Ashdod, KOCKS Crane International GmbH in Bremen received an order to deliver and install four container bridges. Euler Hermes Kreditversicherungs-AG as lead partner. The companies working under this mandate prepare decisions on applications for consideration at the meetings of the IMC and advise the Federal Government together with experts from exporting industry during the decision-making process. Besides the Federal Ministry of Economics and Labour, which has the lead function, the Federal Ministry of Finance, the Ministry for Foreign Affairs and the Federal Ministry for Economic Cooperation and Development also have a vote in the IMC. Decisions are always made on a consensus basis. Containers and general cargo up to 55 tonnes, in heavy load operation up to 94 t, can be transhipped with these modern container-ferrying gantries at speeds of up to 70m/min. This will considerably expedite container handling in the port. Besides the further improvement of the underwriting tools as part of the Federal Government s foreign trade and investment initiative, the IMC carried on an intensive dialogue with exporters and banks in the year under review in order to introduce innovative developments to adapt the forms of cover to the changing requirements of the market. 11

12 The Interministerial Committee A Dialogue with Exporters The export credit guarantees granted by the Federal Government are an important and reliable form of support for German exporters in their competition for international business. An intensive exchange of experience and information with banks and exporters is the basis upon which the underwriting tools of the export credit guarantees are adapted to the latest developments and changing demands of the market, and practical solutions can be found for individual needs was marked by the intensification of this dialogue. An approach which sees the scheme as a partner of business, together with an open exchange of information, makes it easier to successfully meet the challenges now facing us. Three central conferences took place, in each of which an extensive circle of participants drawn from banks, exporting industry and various associations discussed fundamental issues and aspects of state-supported export credit cover. These included such topics as liquidity for small and medium-sized enterprises, the development of commercial claims, the environment and export potential. Dialogue event on in Berlin The conference Federal export credit guarantees in dialogue with industry held by the Federal Ministry of Economics and Labour on18 th May 2004 in Berlin, which was attended by some 250 representatives of industry, commerce, banking, the diplomatic community and business associations, generated important impulses. The outstanding significance of this event was underlined by Undersecretary of State Dr. Alfred Tacke in his welcoming address. He emphasized that the Federal Government export credit guarantees provided effective and indispensable support for German exporters, and in particular for small and medium-sized companies, due to their 12

13 reliability and flexibility. He defined international competition and international cooperation, tapping the potential of new markets, catering for the needs of small business and the environment as the central challenges for the scheme. Dr. Tacke urged the participants to engage in an active dialogue and assured them that the Federal Government would continue in future to make full and innovative use of all the options available to support exporters effectively and reliably. The conference Federal export credit guarantees in dialogue with business took place on 18th May 2004 in Berlin. Left to right: Dr. Michael Rogowski, Dr. Alfred Tacke, Dr. Hans Janus, Dr. Michael Kruse. This exhortation was taken up by Dr. Michael Rogowski, President of the Confederation of German Industry (Bundesverband der Deutschen Industrie (BDI), in his speech. It was especially important in the emerging markets that German exporters should be given the means to adequately secure their risks. He drew attention to the excellent opportunities which German companies had to export cutting-edge technology to the dynamic growth markets for which the Hermes guarantees, as the central instrument of export promotion, were indispensable, particularly through the accompanying role they play for exporting industry in opening up new markets. Dr. Hans Janus, Member of the Board of Management of Euler Hermes Kreditversicherungs-AG, pointed out that only a financially healthy, self-supporting and politically uncontroversial system of instruments for the promotion of exports was able to fulfill its task efficiently. A crucial prerequisite for this is that premiums cover the risks currently assumed and that it is not a form of subsidy. The further development of the underwriting tools available, which had already been modernized in an impressive manner, must continue, especially in order to be able to open up refinancing options for SMEs. The participants discussed both the current demands on the scheme and the export potential of various growth markets in a series of conference workshops. Topics of discussion here were the further improvement of refinancing possibilities, cover for foreign content, the responsible treatment of environmental aspects and multi-sourcing as an opportunity for the financing of major projects. 13

14 The Interministerial Committee Dialogue event on in Berlin Tapping export potential in growth markets The perspectives and risks in the growth markets, in particular Asia, Central and Eastern Europe, the CIS countries and Iran were the starting point for discussions. All those who took part observed that the IMC must react to the very different legal and economic environments in the regions mentioned above flexibly and in ways appropriate to individual cases, in order to effectively support German exporters. The continuing process of liberalization and privatization in the majority of countries has quite clearly diminished the importance of the public sector as a buyer. This means that private sector importers are now coming to the fore. The importance of bank-to-bank credits and transactions on the basis of corporate risk, i.e. the creditworthiness of the buyer company, faces exporters, banks and the export credit guarantee scheme with new demands for risk assessment. The participants proposed determining the requirements for risk assessment on a case-by-case basis. The problems involved in requiring or actually being able to obtain security for selected transactions against the background of international competition were also discussed in this context. On the other hand, the mandatary consortium pointed to their experience in processing claims, e.g. the fact that local creditors often received preferential treatment under security interests taken. The withdrawal of the public sector, e.g. from the financing of major infrastructure projects, leaves gaps which the private market cannot fill without developing innovative financing instruments, due to the absence of security. Focussing on the example of Russia, the participants showed interest in regional guarantees or other forms of state security, so as to be able to realize more projects. In this context the wish was expressed towards the Federal Government that they should show greater willingness to assume cover for transactions in local currency. A tendency was 14

15 observable to denominate the financing of major projects in regional centres of growth with relatively stable currencies in local currency. Liquidity for small and medium-sized enterprises Small and medium-sized exporters declared that export transactions could only come to fruition when secure financing was available. They reported that it was becoming increasingly difficult to ensure liquidity during the handling phase. The reasons given for this included, besides the traditionally weak capitalization of SMEs, the increasingly restrictive lending policy of the banks. This tendency was not only due to Basel II casting its shadow before it, but had already been apparent in recent years. On top of this, there was sometimes a communication barrier between banks and exporters due to the ever increasing complexity of export transactions and new markets for products in geographical regions which had previously been outside the focus of financing. The exporters underlined the important role played by the Hermes guarantees, since the bank rating for them would be considerably worse without a Hermes guarantee. Hermes cover, it was confirmed by exporters and banks, is a tried and trusted means by which companies can refinance themselves. Small and medium-sized exporters, however, have a particularly urgent need of improved refinancing options for their business, in order to enhance their liquidity position. In practical terms, based on their experience with banks, exporters demanded that the Federal Government should above all grant cover for abstract advance payment guarantees and performance bonds. Such guarantees should also, in contrast to existing cover, be extended to include so-called fair calling, thus covering them against the risk of bond calling under any transaction. Representatives of the banks agreed that this would relieve the strain on exporters credit lines with the banks and thus make additional liquidity available. Foreign content and local costs Another workshop was devoted to content from foreign subcontractors and its inclusion in Hermes cover. Exporters pointed out that, due to worldwide competition and the international distribution of production in the age of globalization, deliveries from foreign suppliers were increasingly a necessity in their transactions. Despite their general satisfaction with the regulations in the German system and the 15

16 The Interministerial Committee decision-making process in the Interministerial Committee, the discussion revealed the desire for even more flexibility in individual cases. An additional aspect was the possibilities and the limits of risk-sharing between the various state export credit insurers as regards the provision of cover for foreign goods. In this frame of reference the participants discussed possible approaches for the expansion of options for foreign goods through supplementary regulations for affiliated companies as well as the possibility of reinsurance agreements outside the circle of the OECD countries. The conflicting demands of international competitiveness on the one hand and the interest in as large a German share in a transaction as possible on the other have sparked an ongoing discussion on the issue of foreign content and local costs, and mean that it will stay high on the agenda at the international level as well. The Federal Government assured the exporters that their policy on decisions would remain flexible and take account of the specifics of each case. On top of this, the network of cooperation with other export credit agencies was being extended and further developed. The environment export with a social conscience Export with a social conscience the possibilities and limits of the underwriting tools deployed by the export credit guarantee scheme and how they could contribute to sustainable economic development became apparent in this discussion. Making exports possible in order to safeguard know-how and jobs in Germany, while at the same time paying attention to sustainable development in the buyer countries this is the Federal Government s declared goal on the issue of the environment and export credit guarantees. A major step towards implementing this dual strategy is the application of the OECD Environmental Principles which have been in force since 1 st January They guarantee for the first time common environmental audit procedures for all OECD export credit agencies (see P. 28). This provides a more level playing field for German exporters and ensures a responsible approach to dealing with environmental issues. The participants were in agreement that the conditions set by development aid institutions (such as the World Bank) could only be partially taken over for ECA projects. The power of an exporter to exert a concrete influence on the way in which a project is realized is not compara- 16

17 ble with the room for manoeuvre in a development aid project, where the donor of aid plays a decisive role in accompanying and advising the partner country in the selection, design, planning, direction and monitoring of projects. Applying the standards of politically motivated development aid to ECA projects appears above all problematic when they have no direct connection with the project to be supported. The exporters repeatedly emphasized that it must remain the goal of the Hermes scheme to promote exports, and that state export credit guarantees were unsuitable as the primary instrument of leverage to achieve aid targets. At the same time there was general agreement that ecological, social and developmental aspects had an important role to play in deciding on what projects to cover and that the existing scope of influence to make improvements should be used to the full. This is particularly the case in project financing transactions, where the exporter and the export credit insurer can bring their influence to bear more successfully on the buyer due to the greater dependency of the project sponsor on the financing conditions. In the case of projects with a substantial potential environmental impact, cooperation between the applicant and the buyer to achieve possible improvements should be a priority. The withdrawal of the financiers and the exporters would only result in leaving the field open for a foreign competitor and losing any possibility of influence to achieve environmental improvements. The participants emphasized the great value they placed on international cooperation between ECAs and the development of common regulations such as the OECD environmental guidelines for the export credit guarantee scheme. The work carried out in this field during recent years was regarded as very positive. An appeal was made to the NGOs to play a constructive role in the further process. Multi-sourcing Another of the workshops discussed the opportunities and options presented by multi-sourcing projects. These are projects involving exporters from different countries and sometimes multinational financing. The participants in the discussion see multi-sourcing as a possibility for the financing of important large-scale or infrastructure ventures, since the risks can be distributed among a number of partners in this way. The Federal Government actively accompanies and supports multi-sourcing projects. A broad spectrum of available state guarantees and close cooperation between the ECAs internationally facilitate the realization of such projects. The financing for major infrastructure projects is often handled by international financing institutes. The decisive factor, however, is cooperation and coordination between those involved, frequently a large number of them: a recurring theme raised in the workshops was the necessity for lean and efficient procedures and internationally standardized verification requirements. A wish particularly close to the hearts of the participants was the involvement of the ECAs at an early stage and a more active role of the German export credit guarantee scheme in the negotiation phase of projects, in order especially to support those German exporters who can potentially take the lead role in a multi-sourcing project. 17

18 The Interministerial Committee Conference New challenges in commercial risk on in Berlin The government departments and the mandatary consortium are holding discussions with the banks on the challenges arising out of the increase of commercial risks in the business covered by Hermes guarantees. Almost 80 % of all claims made today are under commercial risk cover. The previous dominance of political claims has diminished accordingly. A fact which should not be overlooked here is that the expectations of recoveries in commercial claims are very low in comparison to political claims, which generally lead to successful recovery under rescheduling agreements. The participants were in agreement that analyzing the risks on a case-by-case basis for each transaction has taken on central importance. The banks reported that they had already responded to this challenge and taken appropriate steps, not least with the regulations under Basel II in mind. The representatives of the consortium explained what they were doing to enhance credit assessment procedures for the export credit guarantees. In cases where a historical evaluation of balance sheet figures is insufficient grounds for a positive decision from the IMC, the possibility of including aspects with a future perspective such as profitability analyses or market position is examined. One crucial result was that ongoing credit monitoring or credit management is needed after cover for a transaction has been granted. If signs of an imminent loss event appear, it thus becomes possible to react at an early stage. In such cases the banks are expected to evaluate the economic situation of the debtor and actively make proposals for possible strategies. These should then be agreed together with Euler Hermes. The Federal Government can lend support in negotiations with the debtor in individual cases and take over the task of coordinating action, for instance with other ECAs. All those involved emphasized that close cooperation on the basis of partnership is important from the application phase through to the discharge of all obligations for a transaction. The elements of risk assessment, too, should be continually improved. It is only through such mutual exchange that the IMC is able to cover commercial risks and support German exports effectively. A detailed report on the event can be seen on our website at commercial_risks.pdf. 18

19 Conference Claims and recoveries on in Hamburg A practice-orientated conference on how to proceed when a loss occurs took place on 29 th September 2004 in Hamburg. At this, experts from the consortium discussed what to do when payment difficulties arise, the indemnification procedure and taking legal action with 120 small and medium-sized exporters in various workshops. Interest in this practically-orientated conference was so great that two additional practical workshop sessions on claims are planned before the year is out. This is a clear signal that the issue of claims and collection in particular is one of great urgency for SMEs. While a claim can be paid speedily in the case of a political claim due to the clearly defined situation, it is more difficult to verify a commercial claim in some cases and to assess the chances of success of the individual claim. The crucial factor which can speed up indemnification is therefore full and complete documentation of what has happened in the covered transaction. Other issues here are credit monitoring and loss management in recovery actions and company restructurings. Active attempts to recover debts are particularly important since, in contrast to political claims, every commercial claim has to be dealt with on its own merits. It soon became apparent that it is a problem, especially for small businesses, to monitor the progress of debt recovery over years. Due to the provisions of the budget law, however, the Federal Government is only permitted to discontinue collection of a debt if and when it is established that the measures taken to recover the monies have no long-term prospect of success or the costs are disproportionately high in comparison to the amount of the debt. You are not alone when a loss occurs from pre-claim notification to recovery after indemnification was the title of a workshop for SMEs. Left to right: Peter Bildstein, Stefan Schloesser, Peter Linse, Dieter Wojahn. 19

20 The Interministerial Committee On the right: Meeting the exporters on their home ground: the Federal export credit guarantees presented themselves at conferences in Erfurt, Frankfurt and Stuttgart. On the left: The Chairman of the IMC, Dr. Hans- Joachim Henckel, explains how the Federal Ministry for Economics and Labour views the export credit guarantee scheme. Specialty issues and general introductions to the export guarantees were the hallmark of many conferences and appearances at trade fairs at which speakers from the Federal Ministry of Economics and Labour, experts from the consortium and client consultants sought a dialogue with exporters on their home ground and presented the instruments available for cover. In the practice-orientated discussion of issues of topical relevance, the exporters received focussed advice and support. Many events were held in cooperation with chambers of commerce, industry associations or banks. For the first time regional events were put on, and these too met with great interest. Such opportunities to get in touch directly with experts who can answer their questions on how to secure their business are of particular benefit to the representatives of small business. Small and Medium-Sized Enterprises In order to enable the exporters to use the possibilities of the cover instruments to the full, they will be given the opportunity to inform themselves in the current year at many events and at trade fairs. On top of this, contacts and the dialogue on practical options can be pursued and expanded in conjunction with chambers of industry and commerce. Speakers from the Federal Ministry of Economics and Labour as well as experts from the consortium stand ready to advise exporters. The export credit guarantees play an outstanding role for SMEs in securing exports to markets 20

21 beset with problems as well as with Basel II looming in the background in generating liquidity. A Federal Government export credit guarantee can facilitate financing, if indeed it is not expressly required by the financing bank as security. It enhances the value of the debt for the lender, since it does not need to be covered by his equity capital. This is why some three quarters of all applications for cover regularly come from small and medium-sized enterprises. Columbia s first wind farm comprises 15 wind turbines delivered by the Hamburg-based Nordex AG. After installing the turbines, the company will maintain them and handle technical operations for one year. Average wind velocities of 10m/sec. have been measured at the location in northern Columbia. With a good distribution curve of wind occurrence, high annual energy generation can be expected. The target is to achieve a broader mix of electricity generation in order to prevent supply bottlenecks. The continuing success of the wholeturnover policy light, which is specially tailored to the needs of small business, shows that the Federal Government has here created an attractive tool of cover. The promotion of renewable energies Germany can boast world-class renewable energy technology. Reinforcing export activities in this sector is particularly important to the Federal Government, since at the same time it strengthens the position of Germany as a producer of industrial goods especially for SMEs and also promotes sustainable international growth. The Federal Ministry of Economics and Labour and the consortium have further reinforced their activities in this field and intensified the dialogue with manufacturers and project teams involved in renewable energy technologies on suitable instruments to promote exports. They also participated in many conferences dealing with the issue (including the climate conference Renewables 2004 in Bonn). Intensive discussion took place at these events on the possibilities of using Hermes guarantees as well as financial investment guarantees in the export of renewable technologies and developing these options. The Federal Government is bringing its influence to bear at OECD level to create more flexible regulations for the granting of state export credit guarantees for renewable energy projects, in order to facilitate financing for such ventures. Exporters are asking for longer credit horizons, since renewable energy projects can otherwise hardly be financed due to the high initial capital outlay and the relatively low earnings as a result of fixed offtake prices. 21

22 The Interministerial Committee The existing regulations already offer a wide range of cover options for exporters of renewable energy technologies. Under the currently valid conditions of the Consensus, for example, a credit horizon of up to 12 years is already permissible for power stations which often operate with renewable technology. In addition under certain circumstances there is the option of more flexible treatment of repayments and the permissible credit periods in a project financing framework. An exchange of views on environmental issues Another goal of the Federal Government was reinforcing the sustainability of exports by ensuring, in close cooperation with exporters, banks, industry associations, NGOs, other ECAs and international institutions, that projects are environmentally friendly. This involved not only a large number of events providing information to exporters, but in particular the active participation in the UNEP environmental workshop held in Rome. (UNEP = United Nations Environment Programme, an agency of the UN). This year, the conference focussed among other aspects on the goal of promoting investment in renewable energy and other environmental technologies through launching initiatives for improved financing and insurance options. This was the fourth time that experts from ECAs, members of the UNEP Finance Initiative, development banks, other financing institutes and non-governmental organizations had met for an exchange of experience and ideas surrounding the issue of exports and the environment. Important innovations and issues These events confirmed the correctness of the course the Federal Government had already taken in its foreign trade and investment initiative to pursue innovative developments of the export credit guarantee system in order to make efficient instruments of cover available to exporters. It was thus able to further improve the underwriting tools during the year under review, while the cover options for many countries were extended due to a general, regular monitoring of cover policy for all markets worldwide. Protracted Default is insured as a standard As of 1 st November 2004 an important new innovation was introduced: protracted default is now insured in short-term specific and revolving guarantees. This means that an insured event is also deemed to have occurred if the agreed purchase price has not been paid six months after due date. Up to now, insured exporters had to prove the insolvency of their foreign buyer in the case of losses under commercial risk. Through protracted default, hitherto only available for business with public buyers and under wholeturnover policies, the exporter can already be indemnified if his buyer has still not paid the insured receivables after a period of six months after due date has elapsed and he has taken 22

23 Uhde GmbH in Dortmund took advantage of Hermes guarantees for a turnkey project to erect a fertilizer plant for the newly founded Alexandria Fertilizers Co. at Abu Qir in Egypt. This will make Abu Qir one of the largest facilities for the manufacture of fertilizer worldwide. The local environmental protection rules, which have more stringent permissibility levels than the World Bank guidelines in some respects, are broadly exceeded. steps to collect the debt during this time. Protracted default covers both the unwillingness and the inability of the importer to pay, irrespective of the reason or the cause of non-payment. This provides general cover for non-payment of receivables. This considerably improves the quality of cover for exporters at no extra premium cost and with the same self-retention, so that a rise in demand for this type of cover is on the cards. Marketable risks There have been some changes in the cover options for short-term business in the European Union. The EU Commission prohibits the granting of state export credit guarantees for exports on short financing terms with credit periods up to two years within the EU and to the core OECD countries. Following the expansion of the European Union to include the ten accession countries as of 1 st May 2004, the Commission holds 23

24 The Interministerial Committee the view that all short-term credit risks in these countries are to be regarded as marketable. Since the other European ECAs also postulate a large measure of marketability in insuring short-term business to the accession countries, they already transferred the shortterm business to private credit insurers in 2004 and discontinued cover as from 1 st January 2005 at the latest. The Federal Government, in close cooperation with exporters, the private credit insurers, reinsurers and banks and industry associations, held consultations and discussions on the issue of marketability in short-term business. As a result, the Federal Government has discontinued cover for this segment under normal circumstances as of 1 st January 2005, following a transition period during which exporters were able to choose. A fully automated plant for the manufacture of aerosol cans was supplied to a US buyer by the Swabian company Hinterkopf GmbH. An integrated printing unit spraypaints and prints the labels on the cans, which are produced in one piece and made of aluminium. For this small company, the financing of this transaction by means of a Hermes guarantee is an important element in securing its liquidity. It is only in the wholeturnover policies light that the option of insuring exports to the accession countries for SMEs with an insurable turnover up to one million EUR remains open. The availability of private sector credit insurance cover cannot be completely guaranteed for these exporters since it does not fully correspond to that previously on offer from the Federal Government scheme. The Federal Ministry of Economics and Labour stands ready to find solutions in problematic cases together with the private credit insurers. Germany is the EU member country most affected by this ruling due to its strong trading flows with Eastern Europe. The volume affected by the discontinuation of cover for short-term export receivables due from the accession countries is some 1.4 billion EUR, representing about 10 % of short-term business. 24

25 cover has now been directly accessible to all German banks since July 2004 (including branches of foreign banks domiciled in Germany). The prerequisite for credit line facility cover is that a basic agreement has been signed between the Federal Government and the bank stipulating a common set of rules for all transactions under credit line facility cover. Credit line facility cover bundles many small credits this may be done both for bank-to-bank credits and for bank-to-buyer credits in a simplified and inexpensive procedure, thus giving small exporting companies access to financing possibilities. Nine contracts have already been concluded. Cover can also be denominated in local currency Credit line facility cover now available to commercial banks The IMC has made further improvements to credit line facility cover and made access to it easier. Credit line facility cover bundles a number of small tied finance credits issued under a credit line facility. After the direct benefit of this form of cover was at first only available via the Kreditanstalt für Wiederaufbau (KfW) and AKA Ausfuhrkredit-Gesellschaft mbh, credit line facility Another improvement is the option of denominating cover in foreign currency, an express wish of exporters. Since 1 st July 2004, export credit guarantees can be granted for receivables directly denominated in the currency of the export or credit finance contract. As contract currency of the export credit guarantees, exporters can choose between the US dollar, the pound sterling, the Japanese yen and the currencies of Australia, Denmark, Iceland, Canada, New Zealand, Sweden and Switzerland. In contrast to the previously available option of securing foreign currency receivables by a eurodenominated export credit guarantee, conversion into euros is here largely unnecessary, since both the premium and any indemnification which may occur are each paid in the foreign currency stipulated. This dispenses with exchange rate risks and administrative costs for the exporters and the banks; this makes processing considerably easier in a reinsurance arrangement with 25

26 The Interministerial Committee other foreign ECAs. The policyholder can basically choose between either an export credit guarantee in euros or in one of the currencies listed above. When an export credit guarantee in foreign currency is granted, a surcharge of 10 % is added to the premium amount which is payable in the foreign currency to cover the Federal Government s exchange rate risk. Receivables for additional work under constructional works transactions The IMC has resolved to introduce a maximum limit guarantee to provide improved cover for additional payments charged after contract signing in constructional works transactions. Such additional receivables accrue as a result of extra work which is only recognized to be necessary during the course of construction and which the policyholder is obliged to carry out under the provisions of the construction contract, prior to negotiating a price for the extra work with the buyer. Due to these special circumstances, which typically do not occur, for example, in plant construction, this type of cover is only available for constructional works transactions. A binding maximum limit for such additional receivables is included in the cover at the outset when the contracted transaction receives a guar- 26

27 antee. The insurable payments due in respect of the specific additional work done are automatically covered as long as the maximum limit still contains a sufficient amount of free cover. The policyholder is obliged to notify to the Federal Government all additional work charged in order to calculate the actual premium amounts due. An advance premium of 5 % of the premium calculated on the maximum limit is payable, based on the conditions applying to short-term supplier guarantees. After notification of the amount due for an item of additional work, the premium for it is invoiced immediately, setting off pro rata the advance premium already paid. No advance premium can be refunded for amounts left unused under the maximum limit. Buyer surcharge for commercial risks in countries with premium Category 1 The IMC has set the buyer surcharge for medium- and long-term business with Western industrial countries in the German premium system at new levels, deciding to triple the buyer surcharge for countries in premium Category 1. The distinction between private sector buyers and bankguaranteed business will no longer be made. The simple buyer surcharge will only remain in the case of buyers with at least an AA rating. Anton Steinecker Maschinenfabrik GmbH in Freising was entrusted by a Mexican brewery with the expansion and modernization of their facilities at several locations. The equipment supplied included an entire brewing house and a newly built cooling area. The new plant will enable a considerable increase in production capacity. In line with the company policy of the Mexican buyer the technology installed here is in compliance with the most recent international environmental standards. The background to this change is that the buyer surcharge hitherto applicable was not commensurate with the commercial risk actually pertaining in business with these countries. Since other ECAs are similarly insuring more and more commercial risk, a consensus emerged that premium with regard to the buyer surcharges should be harmonized or set at more risk-based levels. Work on this is already under way. The tripling of the buyer surcharge resolved by the IMC for countries in premium Category 1 is thus only a necessary stop-gap measure until a full-scale system has been internationally agreed. 27

28 The Interministerial Committee Environmental aspects OECD environmental guidelines The OECD environmental guiding principles stipulate principally that transactions in excess of an order value of 15 million EUR and with payment terms involving a credit period longer than two years must be subject to a preliminary screening process. In 2004, this was the case with a total of 123 transactions (2003: 152) with an order volume of 12.7 billion EUR (2003: 10.9 billion). Of the transactions which underwent preliminary screening, 47 projects (2003: 68) with an order volume of 6.9 billion EUR (2003: 4.8 billion EUR) were assigned to categories A and B due to their particular environmental relevance. These then went through the in-depth screening process under the OECD guiding principles. Since 1 st January 2004 the consideration of environmental aspects by ECAs when granting cover has been regulated by the Recommendation on Common Approaches on Environment and Officially Supported Export Credits agreed at OECD level. For the first time all OECD member countries have agreed on harmonized audit procedures in the shape of the OECD guiding principles. These basic guidelines are intended to ensure that the state export credit agencies audit the environmental impacts of projects responsibly and take account of them in the decision to grant cover. National environmental audit procedures were adapted accordingly. The main changes for Germany compared with the previous situation have been in the categorization of projects (with consequences resulting for the indepth examination of transactions as to their environmental impact), as well as for the publication of environmentally sensitive information in the case of category A projects. The German government has applied the OECD environmental guiding principles (see P. 98) strictly and directly in its decisions to grant export credit guarantees since they came into force. Transparency The publication of information on individual projects has been further expanded. Since January 2004, information on projects which are the subject of an application for Hermes cover has been available on under three different headings. In addition to a list containing all covered transactions with a volume exceeding 15 million EUR, a new heading Individual Projects gives details of particularly interesting foreign projects in close cooperation with each exporter. These texts contain background information on the project, e.g. its significance both for the buyer country and for Germany as an exporting country. On top of this, environmental information according to the OECD environmental guidelines is published on all Category A projects at the latest 30 days before the final decision on cover is to be taken. The range of information about specific projects is thus greater than ever before. 28

29 Customer satisfaction study As part of our efforts to implement a quality assurance programme for the Hermes guarantees, we carried out a customer satisfaction study in late summer of A well-known market research agency polled a representative sample of all exporters and banks who use Hermes guarantees; care was taken to ensure that the entire spectrum of policyholders from large corporations to small and medium companies was covered. The enterprises polled returned a positive assessment of both the service quality and service friendliness of the consortium members and also evaluated the export credit guarantees themselves positively. It is particularly gratifying to see that the assessment did not depend on the size of the company polled. This clearly shows that the export credit guarantees are also an attractive and easy-to-use option for SMEs in securing their business. In the opinion of exporters and banks, the Hermes guarantees have in general become much more transparent and more customer-friendly. Showing the flag at trade fairs is a key factor in seeking active communication with the customer. This is why the Federal Government export credit guarantees were represented at the Hanover trade fair and export21, among others. 66 % of the companies polled reported that they could not have transacted certain export business at all without Hermes guarantees, thus confirming the unchanged importance of export credit guarantees for the economy and consequently also their value in safeguarding jobs. 84 % of the exporters polled reported that the 29

30 The Interministerial Committee products on offer were exactly suited to their insurance needs. Of those polled who had experience with export credit insurers in other countries, 93 % assessed the Hermes guarantees as being equally good or better. This shows that the cover instruments can very well stand up to international comparison. For banks, the Hermes guarantees play an especially significant role, since they are often only prepared to finance export transactions if Federal Government cover has been granted. The banks mentioned the zero weighting of the export credit guarantees as a particular advantage, i.e. that fact that they do not need to be covered by the bank s own equity, as well as the long credit horizons of the guarantees and prompt indemnification. 86 % would do this, and a large proportion of these had in fact done so, especially within the past year. 61 % of those polled expressed the opinion that the export credit guarantees were insufficiently well known and therefore in their view were not used by many small and mediumsized enterprises. The companies polled expressed the wish that the application procedure could be speeded up and the processes entailed in obtaining Hermes guarantees and getting claims paid could be leaner. The results of the poll are valuable indicators as to how we can improve the products of the export credit guarantee scheme. One piece of evidence for the high level of satisfaction with the export credit guarantees is the strong willingness of the companies polled to recommend the Hermes guarantees to others The passenger ferry Labobar, built at the Meyer Werft in Papenburg as the 23 rd ship of a series, was handed over to the Indonesian Directorate General of Sea Communication in June Very similar to her sister ships in appearance, she can accommodate 3084 economy class passengers due to changes and developments in the subdivision of the passenger space. The cooperation between the Meyer Werft and Indonesia has major significance for development aid programmes. 30

31 Special forms of cover Project financing and structured finance In 2004, too, there continued to be strong demand for export credit guarantees for project financing and structured finance business. These financing instruments were predominantly used for projects involving manufacturing plant and in the telecommunications sector. Thus it again proved possible to realize large-volume projects without conventional cover being available. In projects of this type, the bank develops a financing scheme based on the specifics of the individual case and the financial strength of the foreign debtor. The Interministerial Committee assumed cover for six project financing transactions with a total order value of some 374 million EUR in Particularly deserving of mention here are a toll motorway in Croatia, this being the first time that the Federal Government has granted an export credit guarantee for a roadbuilding project on the basis of a project financing construction. Other projects covered were a telecommunications network in Tunisia, a gas and Siemens AG delivered a large part of the technology necessary for the expansion of a country-wide GSM mobile telephony network in Tunisia. Basis and switching stations, directive radio masts as well as a monitoring centre and the centre for dealing with technical faults were erected and connected by software links via network and communications technology. The comprehensive package will contribute to reaching the prescribed target of 99.9 % network coverage by the end of May The project financing scheme under a Hermes guarantee was realized with the involvement of Siemens Financial Services and together with a banking consortium under the leadership of HVB Corporates and Markets, Standard Bank, Arab Banking Corporation and KfW IPEX Bank as Hermes agent in the form of a multi-sourcing project. 31

32 The Interministerial Committee steam-driven power plant in Turkey, a mining project in Argentina, deliveries by subcontractors for the BTC pipeline which runs through Azerbaijan, Georgia and Turkey, and the re-equipment of a power plant in Pakistan. In the year under review the Federal Government gave offers of cover for two further projects to the tune of some 273 million EUR. These are the development of a titanium mine in Mozambique and the construction of a methanol plant in Oman. A toll motorway for Croatia In Croatia, the Federal Government is supporting the rehabilitation and expansion of a 59 km long stretch of motorway running from Zagreb to Macelj by means of a combined export credit and tied finance credit guarantee as well as a direct investment guarantee in respect of a quasi-participation loan. This highly successful interplay of two cover instruments was a significant factor in securing financing from an international consortium of banks led by the Hypovereinsbank and HSH Nordbank. The new stretch of road will carry forward the development of Croatian transport infrastructure. Following the renewal of the domestic motorway links between Zagreb and the Adriatic ports, this now marks the rehabilitation and expansion of the routes to neighbouring countries for cross-border traffic. Croatia, as a European transit country and an EU candidate in waiting, is thus fulfilling the EU Commission s plans for the development of the European longdistance road system. Due to the tight budgetary situation, the Croatian government is relying more and more on private-sector financing for transport projects based on revenues from the collection of motorway tolls (BOT models). For this reason the decision was taken in 2003 to realize the development of the motorway stretch between Zagreb and Macelj on the northern border with Slovenia, which had been in the planning stage for several years, with the help of a project financing scheme. This infrastructure project was structured on the basis of a public-private partnership, in which private investors participate on the basis of the expected revenues from tolls collected, but the state simultaneously assumes responsibility for a whole range of obligations. The successful bid for the financing concession, construction and operation of the projects over a 28-year period came from Autocesta Zagreb Macelj d.o.o. The road will be constructed by the Munich-based DYWIDAG International GmbH in conjunction with Strabag International GmbH in Cologne. The contractors also hold a 51 % stake in the project company. 32

33 As part of efforts being made to restructure payments, a project in the paper-making industry in Indonesia was successfully completed. In addition, substantial progress was made on an iron ore direct reduction plant in Venezuela. Business under structured finance schemes reached a record level in the year just ended. The Interministerial Committee assumed cover for four projects with an aggregate volume of some 924 million EUR. The already good result in million EUR was thus exceeded by a considerable margin. The projects came from the oil and gas sectors, petrochemicals, steel construction and telecommunications. There were also five offers of cover given with a value of some 191 million EUR. As in previous years, the lion s share of the transactions realized went to Iran. In the medium term, these projects will help to strengthen the country s hard currency position, since the export capacity of the country especially in the petrochemical sector is expanded in this way. On top of this, projects in the steel sector will enable the country to produce an increasing proportion of its own needs, thus saving hard currency. For the first time, a project for Iran was implemented together with the National Iranian Oil Company (NIOC). This involves granting a guarantee for the natural gas drilling and processing complex South Pars 9 & 10, which is being handled as a multi-sourcing project under a structured financing construction. The construction consortium consisting of DYWIDAG International GmbH and Strabag International GmbH took over the expansion and rehabilitation of the motorway linking Zagreb and Macelj in Croatia. The project is structured as a public private partnership and will be financed through the toll revenues generated later. Croatia regards the stretch of road as an important section of the domestic transport network which will help to promote tourism and encourage the further location of private sector companies in the region. 33

34 The Interministerial Committee South Pars, Iran The South Pars Gas Field is located on the Persian Gulf on the Iranian- Qatari border some 100 km from the Iranian coast. Something like 8 % of so far proven world natural gas resources are located in this field. The National Iranian Oil Company (NIOC) has drawn up a strategic development plan for the exploitation of the gas reserves in the South Pars Field. Investment phases 9 & 10 will be realized with the help of a structured financing scheme involving a number of credit insurers. Besides Euler Hermes, Atradius (Netherlands), ECGD (UK), K-Exim (South Korea) and Sace (Italy) are participants. The total investment volume of the planned natural gas drilling and processing complex is some 2 billion US dollars. Deutsche Bank AG, Frankfurt, is the lead arranger and agent of the financing scheme. The foreign debtor for the financing loan is NIOC. The overall volume of material and services to be delivered under the project includes onshore and offshore facilities. MAN Ferrostaal Industrieanlagen, Geisenheim and Salzgitter International, Düsseldorf, are responsible as so-called exporters of record for the German share totalling some 373 million US dollars. The repayment of the finance credit is secured at the beginning of the project by the proceeds from the sale of heavy fuel oil. Following the commissioning of the processing plant, proceeds will be forthcoming from the sale of stabilized gas condensate and liquefied petroleum gas (LPG) as security goods. The requirements for this security plan were worked out in close consultation with the other participating ECAs and were the subject of intensive discussions with the foreign debtor and the lead arranger for the financing. The ECAs involved in the financing commissioned an environmental expertise to evaluate possible environmental impacts of the project, which in accordance with the OECD environmental guidelines contained a large number of requirements to be applied in implementing the project. The influence which the export credit insurers can bring to bear was utilized in order to improve the project without any detrimental effects for the exporter. Thus the project company declared its readiness to install an effective technological solution for sulphur recovery. The waste water disposal system, too, is intended to be modified and better adapted to local conditions. 34

35 The first structured finance transaction in India (order volume 85.8 million EUR) was also realized. By integrating new pre-stages into an existing steel rolling mill, the production depth of the foreign buyer will be substantially increased. This will strengthen the company s competitiveness, since in future far less in the way of preliminary products will need to be procured from foreign suppliers at world market prices. This year, too, strong demand for structured finance is on the cards. For example, several concrete enquiries for major projects in Eastern Europe in the petrochemical, paper and steel sectors are currently under consideration. Their chance of being realized depends to a not inconsiderable degree on the commitment of the responsible authorities in the country concerned as well as the development of economically viable financing schemes tailored precisely to the needs of the project. Airbus uses one of largest pressure tanks (autoclaves) in the world for the hardening of complex components. Aircraft business A noticeable improvement in the market environment contributed to increased demand for aircraft. Thus Airbus S.A.S., not least thanks to support from state export credit insurers, was able to deliver a markedly higher number of aircraft during 2004 than in previous years (2004: 320; 2003: 305; 2002: 303) thus defending its position as market leader against Boeing. A total of 68 aircraft (2003: 47 aircraft) was covered together with the ECAs involved in Airbus finance in the UK (ECGD) and France (COFACE). The Federal Government assumed export credit guarantees here for aircraft to the tune of some 1.2 billion EUR (2003: million EUR) exclusively in respect of the German share of manufacture. As in the previous year, the main thrust of cover was aircraft belonging to the A320 family, but Airbus guarantees were also given for more 35

36 The Interministerial Committee Debt restructuring of the Brazilian airline TAM Linhas Aereas S.A., Sao Paulo, successfully completed On an agreement was signed which regulated the restructuring of the debt of the Brazilian airline TAM Linhas Aeras S.A. The final drawing up of the complete documentation is expected for May of this year. The airline had fallen into arrears with its payments in March After almost two years of difficult negotiations, the creditor group comprising several international banks and the Airbus credit insurers and the airline laid down the new schedule of repayment obligations in a term sheet covering debt of million US dollars. This is in respect of receivables accruing from 1999 to 2001 for the financing of four A and four A aircraft. 185 million US dollars of this sum are accounted for by the ECA-insured finance (the share covered by the Federal Government is 66.2 million US dollars) while 26.1 million US dollars are in respect of commercial loans. The regulation envisages principally prolonging the credit term by three years, from 12 to 15 years. It contains the offer by Airbus S.A.S. and IAE International Aero Engines AG to commute the loans under certain conditions from the 13th year under a refinancing commitment. The Federal Government was able, in consultation with ECGD and COFACE, to agree to this since the management of TAM had returned the airline to black figures following a successfully completed cost reduction programme, a reorganization of the aircraft fleet and the conclusion of a code-sharing agreement with the state airline VARIG. These measures should guarantee the long-term recovery of the airline. 36

37 The Federal Government granted cover for 68 aircraft under the Airbus financing programme in the year under review. than 20 aircraft (2003: 10) of the A330-/ A340 families. The regional emphasis lay mainly in the Middle and Far East with 27 aircraft; deliveries to European and African airlines were also secured by means of Airbus guarantees, however. No new claims were submitted in 2004, and the threatening bankruptcy of Air Canada was successfully averted by means of a restructuring plan. No indemnification had to be paid in this case. The airline had suspended payments on 1st April 2003 and was under protection from its creditors up to 30th September The secured German portion of the debt is some 280 million US dollars in respect of 27 Airbus aircraft. The restructuring plan reduces the burden of leasing rates to a level which is sustainable for Air Canada without waiving the right to receive payment. The aircraft continue to be operated by Air Canada. In the marketing of aircraft held as salvage from claims, much better conditions than in previous years were negotiable due to the recovery of the aircraft market especially as regards leasing rates. It was also possible to sell four aircraft. The ECAs were forced, however, to reclaim seven aircraft at the end of the year from the Italian airline Volare. Renewed efforts are currently being made to market these. International cooperation in aircraft business The close cooperation between the three credit insurers was further intensified during the year under review in order to move ever closer to the long-term goal of acting as a single virtual Airbus credit insurer. The starting point for such strengthened cooperation was the introduction of the 100 % guarantee (the so-called Airbus guarantee) on the German side in Since then the three credit insurers have offered a common form of cover. The next step, at first together with COFACE, will be to advance considerations on harmonizing the documentation and credit proposals to be presented to the committees which make the decision. 37

38 The Interministerial Committee Pride of America The cruise liner Pride of America, which was seriously damaged in a gale during the night of 14 th January 2004 in Bremerhaven, was repaired and construction work continued. The ship is intended for delivery in mid After the successful completion of negotiations between the banks, the insurers and the shipowner, the Hermes guarantee already given for this ship was modified, prolonging the credit period and including cover for supplementary financing costs, thus making an important contribution to strengthening the viability of the new financing scheme. Shipping business The gratifying development in the shipping sector was continued in The Interministerial Committee gave final cover for three transactions in all, with a total order value of 770 million EUR. The main thrust in this business was once again the construction of cruise liners. Agreement was reached here on the financing for two cruise liners to be built at the Jos. L. Meyer Werft in Papenburg for the Norwegian Cruise Line. The good order situation for container ships, too, continued unchanged. The Committee made a final decision to grant cover to the Hegemann Group for the building of two 1200 TEU container ships for 43 million EUR for a shipping line in Dubai. The shipping line submitted a follow-on application for another four 1400 TEU container ships for 102 million EUR, for which the Committee gave an indication of cover in principle. All shipping projects were designed as structured financing schemes. Not least due to the favourable economic outlook, it proved possible to assume cover in one case on the basis of corporate risk (the creditworthiness of the buyer). The luxury liner Pride of America, at present being fitted out in the Bremerhaven Lloyd Werft, will be handed over to the owner, the American shipping line NCL, in June. 38

39 Country cover policy In addition to these transactions, the IMC gave indications of cover for a further two AIDA cruise liners to the aggregate value of 700 million EUR. This is the first time that the Meyer Werft, with the help of the Federal Government export credit, succeeded in realizing an order to build ships for the world leader among cruise shipping groups, AIDA Cruises, which belongs to the Carnival Corporation. Additional applications received and enquiries concerning cover for cruise liners give every reason to regard the future positively and underline the leading position held by German shipyards in cruise liner construction. The export credit guarantees thus make a direct contribution to safeguarding jobs here. A central aspect of the work of the Interministerial Committee is setting cover policy in accordance with the risks actually present in the various buyer countries. This forms the basis for the individual decisions to grant Hermes guarantees. The precondition for assuming an export credit guarantee is that the transaction in question has been judged to be eligible for cover and the risk justifiable. When deciding country cover policy the Committee makes a distinction between cover for short-term and extended-term business. Experience shows that short-term cover with credit periods up to one year is virtually exempt from restrictions. It is precisely in short-term business that the Federal Government demonstrates its willingness to maintain cover for a country to the greatest extent possible when payment difficulties are experienced, since here there is a relatively good chance of successful intervention. In this way it can help to enable buyers in crisis-ridden states to continue importing at least a limited quantity of crucial goods. The practice of the Interministerial Committee is to uphold the cover options wherever possible for private buyers with sufficient creditworthiness in short-term commercial business even when unregulated old debt is still outstanding against the country concerned (e.g. Argentina). How differentiated the cover options can be depends on the requirements for security instruments. It is only in relatively few countries which pose a particularly high risk or have unregulated overdues that the facilities for short-term cover are also suspended. 39

40 The Interministerial Committee Risk mitigation measures are mostly taken by the IMC for extended-term cover, in as far as there is no possibility of unrestricted open country policy due to specific country risks. Measures to mitigate risk are the setting of a country cover ceiling with a maximum credit limit and the stipulation of a reference limit, as well as requiring security instruments where appropriate. When the IMC puts a country ceiling in place, this allows cover for medium-term business in the country in question to be granted up to the maximum limit. When it becomes clear that the ceiling will be exceeded, the IMC examines the possibility of setting a further ceiling or considers whether other cover options would be possible or necessary. In order to enable a large number of exporters and banks to use the cover limits in equal proportions, reference limits for individual transactions are set, which can however be exceeded if there are sufficient grounds for doing so. There is also the option, despite the limited availability of cover, to grant guarantees in the case of special eligibility for cover to small-scale projects which promise to earn the country hard currency. As a rule, there is also a chance to obtain cover outside the ceilings in the form of project financing or structured finance cover. CIS countries, Central and Eastern European countries and South Eastern Europe The increasing economic consolidation in the region has enabled the IMC to further open cover policy and to relax existing restrictions. The positive effects deriving from the sustained high 40

41 CIS countries Many of the CIS countries profited from the favourable development in international oil and gas prices. Russia and the states bordering the Caspian Sea, in particular, reaped the benefits of this, generating extremely robust economic growth. In political terms significant changes took place, especially in Georgia at the beginning of 2004 and the Ukraine at the end of the year. A consortium led by VAI Fuchs GmbH in Willstatt erected a modern steelworks in the Russian city of Revda. The electric arc furnace and the air separation plant delivered by the company will enable the economical and environmentally friendly production of a million tonnes of steel every year. level of oil prices have strengthened the economies of many CIS countries and led to a rise in the volume of cover for the Central and Eastern European countries of some 25 % to 3.5 billion EUR. Developments were dominated in the European region by the progressive integration into the EU as a result of its expansion and by the prospects of accession opened up for further countries. The development of bilateral trade relations received effective support through the increased availability of Hermes guarantees. The covered exports to the countries of South-East Europe also went up by 25 % to reach 2.1 billion EUR. Russia is traditionally the most important market in the region. New cover with a volume of 1,420 million EUR was assumed here. This represents a rise of almost 80 % compared with the previous year s figure, 799 million EUR. In this, the fourth most important market for the Hermes guarantees in terms of new cover, besides a substantial increase in short-term guarantees, turnover in the predominant segment, medium-term business, more than doubled. And this against the background that cover was given almost exclusively on the basis of guarantees from Russian banks and of corporate risk, i.e. based on a creditworthiness check of the Russian buyer s duly audited annual financial accounts. Alongside the generally recognized Vneshtorgbank and Sberbank (both of them currently recognized up to 200 million EUR) more than 40 banks are meanwhile accepted as guarantors on a caseby-case basis. State guarantees are only forthcoming in a very limited number of special cases. 41

42 The Interministerial Committee Country ceilings in millions EUR Azerbaijan Kazakhstan Ukraine Uzbekistan Belarus Even though the crisis of confidence in the banking sector in the summer of 2004, when several banks closed down, and doubts which surfaced occasionally as to the legality of the solution found for the crisis of the Yukos Group generated uncertainty in the markets, a continuing development of bilateral trade relations at a high level remains on the cards. Active measures undertaken by the Russian side, e.g. as regards the regulations for a deposit insurance fund, can work effectively to support this development. The insights gained during the visit by an IMC delegation in November particularly into developments in the banking sector largely confirm the positive way in which things are moving. All in all, this continues to be reflected in the positive decisions given on cover. This development is underpinned by the fact that since 2003, with the removal of the country ceiling, a largely open cover policy has been in operation. Kazakhstan once again benefited from the sustained surge in economic growth. Growth unchanged at around 9 % over several years, budget surpluses and increasing levels of hard currency reserves are indicators of this development. The volume of cover given went down slightly from 89.5 million EUR (2003) to 70.9 million EUR (2004), but still remained above the 2002 figure. Following the almost complete utilization of the country ceiling previously set at 200 million EUR, the Committee set a new ceiling not linked to any one year of 300 million EUR with a reference limit of 30 million EUR. At the same time the IMC removed the special regulations in force since 1992 on local costs and foreign content. The positive development of the country led to further improvements in country risk classification and its assignment to Category 4. Business with Uzbekistan posted growth of 65 % to million EUR. The prevailing form of cover here was on medium-term credit periods and included textile machinery and infrastructure equipment. This enabled a return to the high figures achieved during 2001 and The country s economy grew at a relatively low rate compared with others in the region. This indicates, among other factors, the gap which still needs to be closed in terms of integration into the global economy. Due to the excellent payment experience since the independence of Uzbekistan, a new ceiling was put in place for business on credit terms of 150 million EUR again. While in the past only the National Bank for Foreign Economic Activities of the Republic of Uzbekistan (NBU) was accepted up to an exposure limit of 50 million EUR, the Committee granted general recognition in the early part of the year to a second bank, Asaka Bank, for an aggregate exposure of 75 million EUR. 42

43 Heye International GmbH in Oberkirchen delivered the complete engineering package for the manufacture of high-quality glass vessels as well as the machinery and equipment for a production facility for glass to Uzbekistan. Numerous small and mediumsized companies were involved in the project as subcontractors. a common border since May 2004, but also the ongoing consolidation of relations with the CIS countries. The previous year s good result was repeated in business with the Ukraine, reaching a volume of million EUR. Short-term business accounted for the lion s share of this, more than 100 million EUR. A surge in growth of more than 12 % gave vigorous impetus to the country s economy. Although it is hardly to be expected that this level can be repeated in 2005, the democratic change in the government of the Ukraine does hold out the prospect of new impulses. A significant role will be played here by the increasingly close links to the EU, with which there has been The threshold of 100 million EUR in new cover for Belarus was exceeded for the first time. An increase in business of almost 40 % led to a figure of million EUR, with medium-term guarantees slightly dominant over those on short-term payment conditions. An increasing trend towards security from Belarussian commercial banks is observable here. State guarantees are only given sporadically for transactions. After the previous country ceiling for business on credit terms had been almost entirely utilized, the IMC set another cover ceiling unconnected to the year at an unchanged level of 75 million EUR with a reference limit of 5 million EUR. 43

44 The Interministerial Committee The Moldavian Republic remains off cover in view of the persistently problematic overall state of the country s economy and because of the unregulated relations to the IMF and the Paris Club. Nevertheless the IMC has permitted the cautious reopening of cover for private sector business on short payment terms. Demand for cover for Azerbaijan, despite sufficient cover being on offer, is low, in contrast to the dynamic economic growth of the country, which is primarily concentrated in the crude oil and gas sector. TECHNIP Germany GmbH built a diesel desulphurization plant with an annual capacity of 1.5 million tons in Turkmenbashi in Turkmenistan. The diesel fuel produced there already complies with the European sulphur content standards for Thanks to cutting edge technology, sulphur emissions from the plant have been substantially reduced and lie below World Bank permitted levels. 44

45 Central and Eastern European countries Developments in the Central and Eastern European countries were dominated by the accession to the EU of Estonia, Latvia, Lithuania, Poland, the Slovak Republic, Slovenia, the Czech Republic, Hungary, Malta and Cyprus. The prospect of joining the eurozone gives additional impulses, especially since some of these states (Cyprus, Estonia, Latvia, Lithuania, Malta, Slovenia) have already become members of the European exchange rate mechanism (ERM II). Poland with million EUR, the Czech Republic with million EUR, Hungary with 172 million EUR and Slovenia with million EUR were among the 30 countries with the highest volume of cover in Business on short payment terms was far and away the predominant form of cover in these countries. Since their categorization as marketable risks, the Federal Republic decided to stop giving short-term cover on principle for the EU accession countries with effect from with the exception of wholeturnover light policies. A significant reduction in business volume is thus to be expected for coming years in this segment (see P. 32). The macroeconomic progress due to joining the EU led to the reclassification of selected accession countries into better premium categories. Thus Estonia, Latvia, Lithuania, Malta and the Slovak Republic were each upgraded from Category 3 to Category 2 at the beginning of South Eastern Europe In South Eastern Europe, attention was focussed particularly on Bulgaria, Romania and Croatia in The accession to the EU which is in prospect at the earliest for 2007 revived economic activity and further stimulated the implementation of necessary structural reforms. The assessment that Bulgaria has a functioning market economy was confirmed by the EU, which also made a similar statement concerning Romania for the first time. Croatia was admitted to the status of EU candidate in June. The start of negotiations with the goal of joining in 2007 originally planned for early 2005 were, however, postponed. There continue to be intensive EU contacts with many other countries in the region within the framework of already existing or planned stability pacts and association treaties. Romania, with a volume of newly assumed cover of million EUR, moved up to 15 th position of all countries. This represents more than a doubling of volume year-on-year, since a number of major projects on medium-term payment conditions, e.g. in the infrastructure sector, were taken under cover. The overall improvement in the economic situation of the country was reflected in its upgrading to Category 4 in January. The Committee resolved in August to abolish the country ceiling and the reference limits which had been introduced to limit risks. This means that an open cover policy is now operated almost across the board, but major transactions, project financing schemes and other structured finance constructions will still be decided after careful scrutiny on a case-by-case basis in order to take full account of the specific details of the transaction. 45

46 The Interministerial Committee As expected, the previous year s level of business in Bulgaria, which was influenced by a single transaction of 250 million EUR, was not reached. Business with a volume of 76.0 million EUR was covered in 2004, with short-term guarantees definitely in the majority. The IMC upgraded the premium classification to Category 4 and removed the restrictions on country cover through a ceiling or a reference limit. Cover is thus available on an open cover basis for almost all transactions. Turkey continued to successfully pursue its course towards economic consolidation, thus making progress in overcoming the crisis of 2000/2001. An important factor here was the sustained support from the international community, and in particular the additional funds made available by the IMF. At the political level, special importance attaches to the decision by the EU to begin talks on future Turkish membership. It is to be expected that this will generate further stimuli for the process of structural reform. The volume of guarantees assumed for new business continued to rise, going up by 30 % year-on-year to 1,515 million EUR. This makes the country the third most important market after China and Iran. This development was facilitated by the decision of the IMC in February 2004 to lift those restrictions on granting cover which still existed. This means that, with the exception of the security requirements for public buyers, an open cover policy operates. There has traditionally always been a high proportion of covered business on short payment terms. In mediumterm business the trend towards an expanding mix of sectors continued. Besides a multitude of small textile machines, major transactions in the energy sector, the building materials industry, plywood manufacture and the steel industry played an important role. Africa Although the economic fundamentals on the African continent with overall growth of not quite 4 % year-on-year have not appreciably improved, the volume of cover for this region went up by some 55 %. All in all, the Federal Government assumed guarantees to the value of some 2 billion EUR for deliveries to African countries. The largest portion of this, as in the past, was accounted for by the Maghreb states (about 64 %) and the Republic of South Africa (some 24 %). This result is symbolic of the strong political and economic ties of the two regions to the European area, and in particular it clearly indicates the stabilizing effect exerted by the Barcelona Process begun in 1985 as part of the EU Partnership for the North African countries, as well as pointing up the strategic significance of 46

47 Hermes guarantees were used by Otto Wolff Handelsgesellschaft, Düsseldorf, for the export of 150 truck chassis to Algeria. After being assembled at their destination, the completed trucks will be put into service as cement mixer/transporters, tankers, buses and flatbed trucks for carrying pallets. trade relations. The Barcelona Process enshrines a comprehensive scheme for cooperation between the two sides of the Mediterranean on the basis of equality of rights ( ownership ) for the countries bordering the Mediterranean to the South and the North and East. The Federal Government is therefore particularly concerned in spite of the still not inconsiderable political and commercial risks involved to maintain enough capacity to cover demand for guarantees to these regions. Export credit guarantees for Egypt, 775 million EUR after 230 million EUR in 2003, reached the highest volume of any African country. This placed them sixth in the list of the countries with the highest cover volume. The rise is due to large-scale individual investments, three projects for the manufacture of fertilizer alone bringing an aggregate volume of some 600 million EUR. Deliveries for the energy sector, Airbus aircraft and medicinal equipment were also secured by means of export credit guarantees. The Federal Government similarly made a contribution to the successful financing of German export projects in other states of the Maghreb by granting cover. Projects were insured for Algeria, Morocco and Tunisia in the energy sector, water/waste water, steel, telecommunications and in the agricultural sector for some half a billion euros. Particularly deserving of mention is the rise in cover for Algeria; newly given guarantees went up mainly due to the installation of a mobile phone network by some 250 % to 257 million EUR. 47

48 The Interministerial Committee Against the backdrop of the political and economic opening of Libya, as well as of the agreement signed to regulate old debt and the consequent recovery of 125 million EUR, the Federal Government reopened new cover options for the country in August 2004 for the first time for 18 years. There is, however, hardly any demand for guarantees on credit conditions at present. With a cover volume of just under 500 million EUR, the Republic of South Africa lies in 12 th place. These guarantees were first and foremost in respect of consumer durables, capital goods for manufacturing and the packaging industry as well as for the expansion of a deep-water port in a less developed area in the South-West of the country. South Africa, which remains a stable economic centre for the region due to responsible economic policies, has recently been radiating strong growth impulses outwards into neighbouring countries such as Namibia, Mozambique, Botswana and also Angola and Madagascar by means of strong investment flows by South African enterprises in the energy, trans- Rohde & Schwarz installed radio transmitters with aerials and satellite induction equipment at 31 locations in Ghana. This established the ground-based infrastructure for a nation-wide radio and television network. Particular emphasis was placed on ensuring that broadcasts can be received not only by people living in cities, but also in the countryside. 48

49 port, service, food and telecommunications sectors. Consequently there could be good business prospects ahead for German suppliers who were involved in these projects. Average growth of not quite 4 % was insufficient to close the development gap with other areas of the globe which exists in many cases in the Sub- Saharan Regions, rich though they are in natural resources. Arbitrary decisions by state authorities, weak structures and uncertainty in all areas of daily and economic life stand in the way of development there. Besides some obvious regressive steps as, e.g. in Côte d Ivoire, which the Federal Government immediately took off cover in November there were a few instances of positive development. Ghana, Mali, Kenya and Tanzania were upgraded by the OECD country risk experts from premium Category 7 to Category 6 due to the economic progress they had made. The Federal Government made cover options available, too, for business on credit terms to private buyers in Mali and Benin. Country ceiling in millions EUR Angola 100 The conclusion and regular servicing of an agreement on old debt with Angola as well as the state of peace now establishing itself in the country caused the Federal Government to open cover under a ceiling of 100 million EUR for short and medium-term business. This met with lively interest from German exporters, who made enquiries mostly concerning guarantees for the delivery of equipment for infrastructure rebuilding. Latin America and the Caribbean The general upturn in the economic fortunes of the Latin American and Caribbean countries continued into 2004 and gained momentum. Economic growth was up in nearly all countries compared with the previous year. The downturn in indicators of indebtedness, too, was maintained in the vast majority of countries. This positive development was primarily the result of favourable global influences, which enabled the region to profit from high raw materials prices, low interest rates and the recovery in global economic activity. A huge increase in exports from the region led to a general stabilization of the macroeconomic situation. In the midst of this upswing, newly granted cover for the Latin American developing countries surged strongly after several years of flagging demand. After 2.1 billion EUR in the preceding year, order values totalling 2.5 billion EUR were covered in In contrast, export credit guarantees for the Caribbean went down from million EUR to million EUR, following the non-recurring effects of individual major transactions in the previous year. 49

50 The Interministerial Committee Economic growth in Argentina slowed again slightly in the second year following the economic crisis, the process of macroeconomic stabilization is still ongoing, however. Public budgets post positive balances, not least since no debt repayment is taking place. Hard currency reserves have substantially increased due to positive development in export trade, and the average rate of inflation has dropped further. The most urgent problem still remains the restructuring of the high level of foreign debt which had been foreseen for 2004, but had to be postponed once more. In the most recent development, 76 % of the bond creditors accepted the Argentine government s offer, which means a The steadily rising demand for high-quality foils in Brazil generated a further export transaction for Brückner Maschinenbau GmbH in Siegsdorf. Polo Indústria e Comércio, one of the leading manufacturers of foils in Latin America, took delivery of a plant for the production of biaxially stretched foils. The extremely thin but high-strength foils are primarily used in the food industry. Not only is their manufacture very environmentally friendly, but their overall environmental performance evaluation is very attractive. loss for them of 70 % of the cash value of their holdings. At present a question mark still hangs over the resumption of talks with the IMF on a new arrangement and the negotiation of an agreement with the Paris Club creditors. In the autumn the Federal Government widened the scope of the cover options it had already opened in summer of 2002 under restricted conditions for short-term business with private buyers. New applications for cover under a wholeturnover policy are now possible after a stringent creditworthiness check on the buyer. The volume of million EUR covered in the year under review almost regained the level of cover before the economic crisis broke. Due to the increasing improvement in Argentina's economic growth curve, the IMC extended the cover available in March 2005 and put a country ceiling of 100 million EUR in place for medium- and long-term business with private sector customers. At the same time it set a reference limit of 10 million EUR per individual transaction. 50

51 Brazil registered a strong economic upturn in 2004, which generated the highest GDP growth rates since Unrestricted cover for exports to Brazil is available for business with a credit period of up to 360 days, so that there is no change here. The IMC lifted the ceiling with a cover limit of 250 million EUR for longer term business which had previously existed in February 2005, and the country was upgraded at the same time to Country Category 5. After a decline in cover volume over recent years, 2004 marked an increase again in guarantees for exports to Brazil, with 1.05 billion EUR. Brazil thus retains its position as the country in the whole region with the highest cover and occupies fifth place in the list of countries with the highest cover volume. Cover is available without any formal restrictions for exports to Chile, Costa Rica, Columbia, Mexico and Uruguay, while the Federal Government has extended the limited range of cover for business with buyers in Nicaragua to bring it more into line with demand from German exporters. The existing country ceiling for exports to Cuba on short payment terms was raised to 15.0 million EUR, while medium and long-term credit business can Country ceilings in millions EUR Argentina Cuba (2 ceilings) be covered under a ceiling of 25 million EUR. Columbia was upgraded to premium Category 5 by the OECD country risk experts. One of Chile s largest newspaper publishers invested in facilities supplied by the Essen-based company Intergrafica Print & Pack GmbH. From the heat setting roller offset newspaper printing presses up to a complete despatch area, the plant includes all the elements necessary to produce simultaneously a 48-page newspaper and colour supplements. On top of this, the customer took delivery of a sheet-fed offset press for printing high-quality brochures and similar material. Companies from the new federal states accounted for a substantial proportion of the components subcontracted out for this order. 51

52 The Interministerial Committee 76 kilometres of wide-bore steel tubing for the construction of a gas pipeline in Trinidad and Tobago were delivered by EUROPIPE GmbH in Ratingen to the NATIONAL GAS COMPANY OF TRINIDAD AND TOBAGO. The pipeline will make an important contribution to sustaining the country s economic upturn. The public buyer was particularly concerned to avoid negative environmental impacts. Permanent monitoring and dedicated programs play an important role here. The political events of 2004 in Venezuela resulted in a consolidation of the government s position. Following two years of recession, the Venezuelan economy moved into positive growth again, influenced by the rising price of crude oil. The country risk evaluation by the OECD upgraded Venezuela to Category 6. After a period in which only projects with a high priority were eligible for cover after a case-by-case assessment, the improved economic situation and the relaxing of political tensions led to the cover options being expanded in November. Since then, cover for business with a credit period of up to 360 days is available without formal restrictions, while transactions on longer payment terms may be insured on a case-by-case basis with a reference limit of 20 million EUR per transaction. Since the exchange market controls remain in force, the grace period and waiting period before registering a claim, which were extended to a uniform nine months, remain valid for the time being. 52

53 Asia The volume of cover for the Asian countries rose steeply by 52 % to reach a total of 9.3 billion EUR after 6.1 billion EUR the year before. The East Asian countries normally account for the major part of this, and here the volume of new guarantees jumped by more than 36 % to 4.5 billion EUR. China once again led the field of the countries with the highest newly assumed cover (2.4 billion EUR, up 80.8 % on 2003) and continues to be the motor driving growth in the region. China is likely to remain an economic motor for global and Asian growth in Alongside this, domestic demand will be a factor of growing importance in most Asian countries. Risk factors for growth in the region which should be mentioned are the possibility of a hard landing for China s economy and the high oil price, as well as the interest rate hike expected in the course of the year in America. Following strong growth of 6.9 % in the previous year, the Asian economies, according to the estimate of the Asian Development Bank (ADB), reached the most robust economic growth since the outbreak of the Asian crisis of 1997, posting growth of 7.6 %. This makes them once again the fastest-growing region worldwide. Even before the great tsunami disaster, however, the ADB had revised its forecast for 2005 downwards from an initial 7.3 % to 6.5 %. Voith Paper Fiber Systems in Ravensberg delivered a state-of-the-art plant for processing recovered paper to manufacture newsprint to China. It is one of the largest of its type in the world. The task of a recovered paper processing plant is to produce suitable fibrous pulp which can be used to manufacture paper on the paper machine without any hitches. The process includes the removal of impurities such as glass, stones and metal, as well as getting rid of other unwanted material such as printing ink, stickies, plastic film and styrofoam. 53

54 The Interministerial Committee The vast majority of export credit guarantees for China is accounted for by projects for the construction and modernization of steelworks, as well as plant and machinery for paper manufacture. A high proportion of the capital goods transactions were carried out on the basis of security by letter of credit and on short payment terms for goods delivered and services performed. This reflects the high level of liquidity in the Chinese market. The Federal Government is prepared, on principle, to insure capital goods business on the basis of corporate risk, i.e. the creditworthiness of the buyer. The documentation necessary for the credit check (annual financial statements as well as credit reports from reputable sources) is, however, difficult to obtain in many cases. The option to accept further banks besides those already generally recognized as guarantors after an appropriate examination similarly continues to be available. Thailand presents a positive picture with economic growth of just over 6 %. This is fuelled mostly by investment and domestic consumer demand, as well as strong export growth. Thailand has meanwhile overcome the Asian crisis and ranks alongside China and India as one of the most attractive goals for inwards investment into the region. For Thailand, there was an increase of 14 % in comparison to 2003 to million EUR. Due to the overall economic development and the positive payment record, the cover restrictions for both the public and private sectors decided on at the time were lifted at the end of 2004 and the open cover policy which existed previously was reinstated. The growing market in China for polyester fibres for applications in textile manufacture was the starting point for an export order won by Frankfurter Zimmer AG. The contracted work included designing a facility for the production of polyester staple fibre and the delivery of the appropriate machinery and equipment, installing it and commissioning the plant in the country. The project reinforces the technological position of Zimmer AG in Asia and safeguards numerous jobs, including those in subcontracting firms. 54

55 The Oberhausen company MAN Turbo AG insured the export of an air compressor line to India by means of a Hermes guarantee. The air compressor forms part of a chemical facility which can produce terephthalic acid as a source material for the manufacture of polyester. This investment has created some 1,100 new and extra jobs in the Haryana region about 150 km northeast of Delhi. India, too, enjoyed an upturn encompassing virtually every sector of the economy. Dynamic growth in manufacturing industry is, together with the service sector, rapidly becoming the second pillar buttressing overall economic development, while the agricultural sector, due to its great dependence on the monsoon cycle, has meanwhile been left far behind by the two sectors mentioned above. Even if the high growth level of 8 % in the financial year 2003/04 will not be equalled, high growth rates of over 6 % are forecasted. India is regarded as one of the countries which benefited from the WTO quota regulations for textile exports which expired as of 1 st January Compared to the previous year, cover for India rose markedly by 33 % to 450 million EUR. For small transactions as well as major projects, export credit guarantees were given here on the basis of corporate risk (frequently with collateral security). 55

56 The Interministerial Committee In contrast, Indonesia has still not completely recovered from the Asian crisis. With economic growth of 5 % both last year and in the current year, Indonesia lies below the regional average. There are only two among the mass of potential growth sectors, such as the automobile industry, which have managed to regain their previous level. Since consumption is the main factor driving growth in this year again, the government under the new President intends to take steps to kickstart economic growth. In view of the unchanged weakness of investment, the new government sees its priority task in combating investment disincentives such as a lack of legal certainties, corruption, high taxes and bureaucracy, in order to improve the overall business climate and attract inward investment. In comparison to the turnover growth in business to the other states of the region detailed above, Indonesia posted a decline in cover assumed by almost 23 % to 337 million EUR in the year under review. The export credit guarantee scheme of the Federal Republic of Germany operates an open cover policy for China, Malaysia and Thailand. Export credit guarantees are also available for South Korea on the basis of recent credit reports after close scrutiny of the economic viability of the project. No changes have been made in cover policy for Indonesia and the Philippines. One criterion for the risk assessment when deciding on cover is whether the transaction will generate hard currency earnings. A HPH hood annealing plant comprising 20 annealing bases and 11 heating and cooling hoods was delivered to Taiwan by LOI Thermprocess GmbH in Essen. This large-volume order from the China Steel Corporation was secured with a Hermes guarantee. The facility is for annealing thin sheet, whereby five of the units are equipped for high-temperature annealing up to 850 C material temperature. 56

57 Know-how and technology made in Germany recycling fluorescent tubes in Korea Due to the tentatively positive development in Afghanistan and Cambodia, a cautious reopening of cover for these countries was decided at the end of the year under review after years of being off cover, primarily for small-scale business on short Country ceiling in millions EUR Pakistan 50 payment terms with private sector buyers. In the case of Pakistan cover under project finance and structured finance schemes can be obtained outside the country ceiling of 50 million EUR. Both Pakistan (Category 6) and South Korea (Category 1) were upgraded in the year under review. Herborn GmbH has been in the business of recycling discharge lamps containing toxic substances since Constant enhancement of their methods led to a groundbreaking technology for the safe recycling of lamps and the recovery of secondary raw materials free of toxic residues. One of the few manufacturers of facilities for the recycling of fluorescent tubes in the world is Herborn GmbH, based in Ginsheim-Gustavsburg in the Rhein-Main region. The company owes its leading position within the industry above all to its comprehensive know-how and to the development of its own patented recycling technology, which enables almost total re-utilization of the materials. More than 95 % of the material in the lamps is recycled into high-quality secondary raw materials in the Herborn GmbH plants. This was what tipped the balance for the Korean customer, since Korean lamp producers have been legally obliged since the beginning of 2004 to ensure that fluorescent tubes are recycled. Five different stationary plants for the recycling of different types of fluorescent tube as well as the associated plants for distilling mercury were shipped to Korea. This was the first time that the medium-sized company used a Hermes guarantee to insure an export transaction. It was the competent and comprehensive advice he received at the outset of the project which convinced managing director Thomas Herborn: For small businesses like ours the information you get on the country and the customer s financial strength are a vital precondition for the success of a project. The security of knowing that you are protected if there is a payment default and the higher liquidity it brings are further points in favour of taking a Hermes guarantee. 57

58 The Interministerial Committee The Middle East Economic growth in the countries of this region was above the global average in 2004, coming in at an average of just over 6.5 % compared with a worldwide figure of 5.1%. The volume of export credit guarantees almost doubled in comparison to the previous year: after some 2.1 billion EUR in 2003, cover to the tune of almost 4 billion EUR was assumed. The backdrop to this is the continuing rise in oil revenues and a more optimistic perception of the stability of the region. In this context the renewed efforts of various governments to diversify and carry through reforms with the goal, among others, to reduce traditional dependency on natural resources were a crucial crystallization point for these positive developments; it has to be said, however, that this process is by no means equally distributed over all the countries of the region. It is first and foremost in the smaller members of the Gulf Cooperation Council (GCC), countries such as Bahrain, the United Arab Emirates (UAE), Oman and Qatar, that these efforts towards closer integration into the global economy and to establish a liberalized economic and to a certain extent social system are most advanced. The positive effects of interaction between economic and social liberalization which reaches down into every level of society is apparent in the advanced countries, clearly visible in relatively low unemployment figures and a markedly lower risk assessment: Oman and Qatar were upgraded by the OECD country risk experts from Category 3 to Category 2 in November. The steep rise in private investment flows, especially into Dubai (UAE), is a further indicator for this. Besides the massive rise in export credit guarantees for Iran, cover volume for Bahrain, Qatar and Fujaira (UAE) as well as for Sharjah (UAE) at least doubled compared with The type of transaction covered for buyers in these countries were in the main capital goods for the construction of water supply systems, machinery and spare parts as well as components for power stations. In countries such as Syria, Lebanon, Yemen and Jordan, however, economic and political progress is proceeding at a snail s pace. For this reason the problems associated with very high unemployment and sometimes rather unstable macroeconomic fun- Country ceilings in millions EUR Syria 25 58

59 damentals remain. Fundamentalist and anti- Western tendencies as well as the complex regional situation with its knot of intractable conflicts at the same time increase the risks of business opportunities for German exporters, which are in themselves quite good. There has been a slight improvement in the economic climate in Jordan. This is why the country was upgraded in October 2004 from risk Category 6 to Category 5. A facility for the production of processed cheese products will play a significant role in ensuring the food supply of the Saudi Arabian population. A number of small and medium-sized enterprises under the lead management of Stephan & Machinery GmbH & Co. in Hamelin are involved in the project as subcontractors. The facilities are at the cutting edge of process technology and also in environmental safety, and represent a benchmark standard for the Arabian market. 59

60 The Interministerial Committee Export credit guarantees for Saudi Arabia went up slightly. With a rise of not quite 7 % on 2003, reaching 526 million EUR, Saudi Arabia was Number 10 among the countries with the highest cover. This was in respect of export projects in the steel, cement and energy sectors as well as in consumer goods manufacturing. Virtually all these transactions were covered on short payment terms. For Iraq, a major hurdle in the way of making new cover available was surmounted with the agreement reached in December 2004 in the Paris Club of creditor countries (see P. 82). Although this has improved the preconditions for reopening cover, no cover options are currently open for pure export credit risks due to the continuing state of insecurity in the country. German exporters can obtain cover, however, to the extent that the envisaged transaction is comparable with the Oil for Food Programme, or in individual cases for pre-shipment cover. Supplier risks in Iraq can be covered as soon as a letter of credit from a third country bank can be produced. The Federal Government will continue to monitor developments closely, so as to be able to provide cover where appropriate. Focus on: Iran Federal Government export credit guarantees played a crucial role for German exports to Iran; the volume of cover taken out on Iranian buyers was up over the previous year by a factor of almost 3.5 to some 2.3 billion EUR. The Federal Government thus insured something like 65 % of total German exports to the country. Iran lies second in the league of countries with the highest cover in 2004, hot on the heels of China. The country is enjoying a stable economic situation thanks to the revenues from exports of oil and gas, which generated growth of some 6 %. The Iranian government uses this situation to full effect: virtually the entire range of imports covered on credit terms as well as a major part of the goods imported on short payment terms are capital 60

61 goods for the expansion of the country s industrial infrastructure. German exporters are collectively one of Iran s largest trading partners, who benefit from the country s efforts to expand and diversify with the support of the Federal Government. For example, cover was given for a number of major projects in the energy generation and petrochemical sectors, in some cases as structured finance schemes. Against the background of the high level of demand for cover, and in view of the very good record of debt service in the country and its good payment record and strong financing constructions, the Federal Government lifted the restrictive country ceiling in place previously and replaced it by a case-by-case examination. The IMC manages its total exposure to Iran by holding it at a level appropriate to the overall risk and the country s ability to service its debt, which are monitored and analysed in an ongoing process. This guarantees a range of cover options which is at the same time flexible enough to enable optimum risk management. 56 gas filling stations were delivered by MAN Ferrostaal in Essen to Iran for the establishment of a network of filling stations. The target is to replace the high volume of petrol imported and to reduce environmental pollution by achieving lower exhaust emissions. 61

62 International Cooperation Developments in the OECD International cooperation between the export credit insurers in the industrialized member states of the OECD in the year under review focused on the following aspects: 2004 was a year of consolidation in the work of the OECD Export Credits Group. On 1 st January 2004 the OECD Recommendation on Common Approaches on Environment and Officially Supported Export Credits came into force. The year 62

63 under review was marked by the implementation in the individual member states of these expanded OECD environmental guidelines. The guiding principles enable the application of standardized criteria for examining environmental aspects when granting export credit guarantees and thus mark a significant step towards creating a level playing field in competition. A new wording of the OECD Consensus was passed in the OECD Consensus Group, and has been in effect since 1 st January The aim of this reform was to make the text more userfriendly and easier to read, without changing the substance of the rules. In addition there was to be more transparency for non-oecd member states, since these countries are increasingly operating export credit insurance systems for the promotion of capital goods exports on medium and long-term payment conditions which are comparable to those of the classic industrial nations. The OECD Consensus was therefore more closely adapted to the systematic structure of the WTO Agreement on Subsidies and Countervailing Measures. The Group is continuing its efforts to generate an intensive dialogue with those countries which are interested in export credit issues, but are not members of the OECD. For instance, it was agreed to begin negotiations on a reform of the OECD Sector Agreement on aircraft with the involvement of Brazil during the current year. In addition, intensive discussions began on reforms to the material rules of the Consensus. In particular, credit periods, the repayment profile, local costs and the credit conditions for renewable energies are high on the agenda. It is intended to conclude this very far-reaching fundamental discussion on reforms within the current year. Agreement was also reached in the OECD Consensus Group to record data on untied aid credits, at first for a limited period of two years, in order to create more transparency. The primary aim of collecting this data is to ensure that tender procedures for projects supported by an untied development aid credit are in fact fair and transparent. The OECD Premia Group continued its discussions on the transparency of the methods of calculation used by the national credit insurers in setting premium rates for commercial risks. According to the results obtained to date, the premiums for the area of commercial risk not harmonized by the OECD rules diverge considerably from each other. The overall premium amount is accordingly affected by this. Against the background of the pertinent WTO rules on premium calculation by state export credit insurance schemes, the discussion centred on premiums for business with private buyers and/or with private banks as guarantors in countries where the political risk is assessed as being negligible ( Category 0 countries ). Besides this topic, the Group began developing a methodology to allow the approximation of the premiums for political risk cover harmonized across the OECD to the risk mark-ups in the private capital market in cases where finance with a comparable level of risk is involved. The goal at the end of the day is to take the appropriate market benchmarks into consideration in any future review of the level of minimum premiums. 63

64 International Cooperation European Union The group of OECD Country Risk Experts assesses country risk, and carried out evaluations of 145 countries during the year under review, allocating countries to one of the seven categories in the country risk model which underlies premium calculation. The quarterly meetings of the Group ensure that significant economic developments can be factored into the categorization process without undue delay. The current country classifications can be seen on our website at Due to improved economic and financial data as a result of the high oil price, a number of Middle Eastern countries were upgraded. The improved budgetary situation led to a noticeable decline in the payment risk of these countries, despite the fact that the structural weaknesses observable due to a comparatively undiversified economy remained unchanged. In particular, the one-sided concentration on the petroleum sector, and here again on the export of primary materials rather than refined products, make these economies highly vulnerable to fluctuations in the oil price. Venezuela was also able to profit from this development. The first steps in the direction of normalization after the tense situation of recent times were apparent here. The EU Council Working Group on the coordination of policy in the field of credit insurance, bonding and finance credits played an important role in the year under review, especially in coordinating the positions taken by the EU on the issues discussed in connection with the reform of the OECD Consensus. Particularly deserving of mention is a proposal drafted partly as a result of a German initiative to flexibilize the Consensus rules for renewable energies and hydrological projects. Longer credit periods and a higher proportion of permissible local costs are intended to take account of the special circumstances of these sectors and to create incentives to promote projects of this type with positive environmental impacts. Ten new countries joined the EU on 1 st May The Working Group integrated these countries, which had already enjoyed observer status since mid-2003, into their ongoing work schedule. A theme of particular relevance in the EU is marketable risks. The Commission Notification for short-term business of 2001 prohibits state export credit cover for exports on short financing terms within the EU and to the core countries of the OECD. The European Commission inclines towards regarding all short-term credit risks in the accession countries as also being marketable. Against this background, the Federal Government decided to stop granting new short-term specific guarantees as well as cover under wholeturnover policies for the accession countries as of 1 st January 2005, but to honour existing policies up to their expiry. Cover under a wholeturnover policy light is being given at the previous level until further notice, since there is no realistic alternative for small and medium-sized enterprises on the private insurance market. 64

65 At the end of 2004 the Commission ordered an expertise with the purpose of reviewing the definition of marketable risks. This expertise is due to be completed in early Since there was some delay in ordering the expertise, the Commission has prolonged the Notification originally due to run out at the end of 2004 until at the latest 31 st December In the interests of maintaining a functioning set of underwriting instruments for short-term business, the Federal Government is pressing for the expansion of marketable countries to be restricted to the ten EU accession countries. Berne Union The Berne Union (BU) meanwhile comprises 54 state and private credit insurers from 43 countries. For the state or officially-mandated export and investment insurers (ECAs), the Berne Union is a valuable and increasingly important forum for the international exchange of information about countries and relevant issues. Apart from the Dr. Hans Janus, Member of the Board of Management of Euler Hermes Kreditversicherungs-AG, was returned for a second term as President at the annual meeting of the Berne Union. Piper Starr of US EXIMBANK was elected Vice-President. Left to right: Martin Endelman, Kimberley Wiehl (General Secretary), Dr. Hans Janus, Luis Antonio Ibanez, Lennart Skarp (Deputy General Secretary) 65

66 International Cooperation intensification of the scope of cooperation between the individual members, the contacts to the International Credit Insurance & Surety Association (ICISA), the largest global association of private export credit insurers alongside the BU, were further expanded. Thus the two organizations held a workshop together in early 2004 in Amsterdam on the theme of support for SMEs. As in the previous year, the issues surrounding changing financing conditions raised for the (state) export credit insurers by Basel II took pride of place in the proceedings. The increased involvement of ECAs in the restructuring arrangements necessitated by the payment difficulties of major foreign debtor companies, including the coordination of efforts with other groups of creditors, played an important role in the discussions at the various BU forums. At the international level, too, the sustained shift of emphasis away from political and towards commercial claims, as well as the direct and indirect impact of this on the work of the ECAs was an important topic, ranging from credit underwriting up to activities to recover monies after indemnification. Among other events, a workshop on this theme was held in Vienna in December. In the monitoring of countries, Asia, focussing on China, and Latin America and several North African countries were at the forefront of consideration. At the Annual General Meeting of the BU in October 2004 in Taipei the currently serving President of the BU, Dr. Hans Janus, Member of the Board of Management of Euler Hermes Kreditversicherungs-AG, was returned to office for another year. In addition, in the person of Piper Starr of US EXIMBANK, a woman was elected Vice-President of the BU for the first time. And finally, the commitment of the Berne Union to the further development of the activities and goals which it has pursued during the almost 70 years of its existence found their echo in the resolution of a common Berne Union Value Statement. In this declaration the members pledge allegiance to ethical and environmentally relevant values in the context of the promotion of exports and foreign investment. The statement reflects the members commitment to global trade on the basis of sustainability and responsibility. ( 66

67 Experts from the OeKB and the consortium discussed the topic of reinsurance and the improvement of cooperation at a two-day workshop in Hamburg. Cooperation with credit insurers in other countries As part of the German-Brazilian Trade Days in Stuttgart on 21 st June 2004 a cooperation agreement was signed with the Brazilian export credit insurer Seguradora Brasileira de Crédito à Exportaçao S.A. (SBCE). The agreement envisages closer cooperation by means of parallel and joint insurance constructions for individual transactions as well as an intensified exchange of information about common German-Brazilian projects in third countries. * Reinsurance: Using the reinsurance model, projects involving exporters from different countries (multi-sourcingprojects) can be covered by a single export credit insurer, so that the main supplier and the financing bank only have to deal with one partner. The risk is shared between the parties to the reinsurance agreement according to the national percentages of goods delivered. In 2004, too, multi-sourcing-projects benefited from the option of one-stop shopping from a single credit insurer. Cooperation in the form of reinsurance* enabled the entire joint German-Danish project to erect a wind farm in Columbia to be covered by a Federal Government guarantee. 67

68 International Cooperation The Danish export credit insurer EKF reinsured the Federal Government for the Danish share of deliveries. Several working meetings and workshops were held with other ECAs to further improve cooperation in the field of reinsurance. Besides working meetings with SACE (Italy) and EKF (Denmark), a two-day reinsurance workshop was held with the OeKB in Hamburg. This was in fact the second German-Austrian meeting on this topic. Directly following this workshop, there was for the first time a temporary exchange of underwriters from the credit departments of the two companies, which both sides judged as being very useful and helpful. The accession of the ten new countries to the European Union on 1 st May 2004 greatly simplified the cooperation with these countries in the form of joint insurance*, since this is regulated between EU member states by a Council Direc- German-Japanese consultations in Kanazawa, Japan from November Members of the German delegation: from right to left: Dr. Sven Heckel and Dr. Michael Kruse (Federal Ministry for Economics and Labour), Dr. Hans Janus and Dr. Eckehardt Moltrecht (Euler Hermes) 68

69 tive. On top of this, the inclusion of deliveries from these countries up to % is now possible. Outside the multilateral committees of the EU and the OECD, bilateral consultations are held at regular intervals with important European partners as well as with Japan. There is also an annual meeting of the G7 export credit insurers. * Joint insurance: When the primary supplier passes on his foreign risks to the subcontractor, e.g. when the latter only gets paid when the foreign buyer has paid the primary contractor, an application can be made for so-called joint insurance. Among EU member states, this is regulated by a directive from the Council. There are bilateral agreements with other credit insurers. Besides this, there is the option of concluding a joint insurance agreement with other state export credit agencies covering just a single transaction. Cooperation agreements Austria S, C, R Belgium S, C, R Brazil C* Cyprus S, C Czech Republic C*, R Denmark S, C, R Estonia S, C Finland S, C, R France S, C, R Greece S, C Hungary C* Israel R Italy S, C, R Japan S*, C*, R Kanada R Latvia S, C Lithuania S, C Luxembourg S, C, R Malta S, C Netherlands S, C, R Norway S*, R Poland C*, R Portugal S, C, R Slovak Republic S, C Slowenia C*, R Spain S, C, R Sweden S, C, R Switzerland S*, C*, R Turkey C* United Kingdom S, C, R S subcontracting deliveries for % pursuant to decision of the Council of the EU (up to 40 % in the case of order values under 7m EUR) S* subcontracting delieveries of 30 % according to bilateral agreement C coinsurance agreement under EU regulations C* coinsurance under bilateral agreement R reinsurance agreement on a bilateral basis 69

70 Development of export credit guarantees Cover for new business The Federal Republic of Germany granted export credit guarantees for exports to 159 countries in the year under review. Newly covered business reached an all-time high, with a rise of 31.8 %, order value at year-end was 21.1 billion EUR after 16.0 billion EUR in In newly covered business China led the field, followed by Iran and Turkey. The ten countries with the highest cover volume accounted together for 55.6 % of insured orders. China once again topped the list, with an increase of 81 %. The majority of export credit guarantees is in respect of plant and machinery for the manufacture of paper and projects for the construction and modernization of steelworks. As in previous years, capital goods transactions were done almost exclusively on short payment terms. This reflects the high level of liquidity in the Chinese market. 70

71 Cover for Iran has more than tripled and mostly concerned medium and long-term projects in the energy and petrochemical sectors. For Turkey (up by 30 %), besides cover for shortterm business, extended-term Hermes guarantees were granted for a turnkey project to construct a gas and steam power plant, a plywood factory as well as for deliveries of machinery to virtually every sector of the economy. Business with Russia, too, has developed in a gratifying way. Cover volume went up by 77.6 %. Export credit guarantees were given for mobile phone projects, information systems, medical equipment and projects for the expansion and modernization of steelworks. Top markets for new guarantees 2004/2003 in billions EUR P.R. China Iran Turkey Russia R.F Brazil Egypt Taiwan Poland Mexico Saudi Arabia Subtotal 2004: 11.72bn EUR (55.6%) Total 2003: 21.07bn EUR (100%) 71

72 Development of export credit guarantees Covered percentage of total export volume by country group in % Guarantees by country group in billions EUR '00 '01 '02 '03 '04 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 Industrial countries Central/Eastern Europe Developing countries Industrial countries Central/Eastern Europe Developing countries New business with Brazil continues to be largely based on wholeturnover policies, covering shortterm trade transactions. Turnkey projects to build three fertilizer factories in Egypt were secured by means of export credit guarantees. A Hermes guarantee was assumed for the delivery of 42 locomotives for a public transport system to Taiwan. Breakdown of newly covered business by country groups In regional distribution of new cover the developing countries and in particular here the threshold countries once again accounted for the lion s share with 75.8 % (2003: 75.1 %). The Central and Eastern European countries reached 16.7 % after 17.7 % in the previous year, while the Western industrial countries, true to form, brought up the rear with 7.5 % (2003: 7.2 %). 72

73 Volume of cover for Central/ Eastern Europe in billions EUR Volume of cover by country group '00 '01 '02 '03 ' millions EUR % millions EUR % Industrial countries 1, , Central/Eastern Europe Developing countries Total European developing countries African developing countries Latin American developing countries Asian developing countries Near/Middle East Southern/Central Asia East Asia Oceania 2, , , , , , , , , , , , , , , , , , Guarantees 2004 for Central/Eastern Europe in millions EUR Russia R.F. Poland Romania Czech Republic Hungary ,419.7 Subtotal: 2,937.9m EUR (83.4%) Total: 3,522.7m EUR (100%) Total exports from the Federal Republic of Germany to developing countries stood at billion EUR after billion EUR in the previous year. Of this, exports to the tune of 16.0 billion EUR were covered by Federal Export credit guarantees this represents a share of 13.2 %. The main thrust of cover for the developing countries in 2004 was again focussed on the countries of Asia, whereby East Asia* plays a leading role with a share of 21.3 %. Deliveries to the Middle East also posted a strong increase to 19.2 %. The share of the Asian countries in total cover rose from 38.2 % to 44 %. The highest cover was assumed for China and Taiwan. (*Please refer to the country categories in the Annex P. 100). German exports to the Central and Eastern European countries went up 12.1 % year-onyear. Newly granted cover, in contrast, rose by 24.7 % to reach 3.5 billion EUR. The rate of Federal Government covered business is thus 4.3 %. An increase in export credit guarantees was observed for almost every one of the Central and Eastern European countries. 73

74 Development of export credit guarantees Guarantees 2004 for industrial countries in millions EUR United States United Kingdom Netherlands Sweden Italy Subtotal: 1,263.6m EUR (79.0%) Total: 1,582.0m EUR (100%) Covered exports by horizon of risk in billions EUR Due to the risk structure of short-term credit sales in the Western industrial countries and the availability of insurance cover from the private market, there is relatively little demand for state export credit guarantees for exports to these countries. In the year under review the industrial countries accounted for exports with a value of billion EUR, representing 72.1 % of total exports. Export credit guarantees went up by about a third due to a number of major projects, reaching just under 1.6 billion EUR after 1.2 billion EUR in the previous year. Cover was given here, for example, for two cruise liners for the USA and the UK. The share of the industrialized world in total export credit cover is 7.5 %. As a proportion of total exports to the industrialized countries this resulted in a covered share of 0.3 % Breakdown by horizon of risk and type of cover A breakdown of newly covered orders in the amount of 21.1 billion EUR by horizon of risk and cover type is shown in the diagram on the left. '00 '01 '02 '03 '04 Specific policies over 5 years Specific policies 1-5 years Specific policies up to 1 year Wholeturnover and revolving policies In short-term business with credit periods of up to one year the volume of cover rose by 22.6 % to 13.4 billion EUR. Differing trends emerged for the various types of short-term cover: Turnover in wholeturnover policies climbed by 10.6 %, while the turnover covered by revolving policies rose only slightly (5.9 %). In short-term specific cover, in contrast, there was a robust surge of 61 %. The share of short-term guarantees in total cover nevertheless declined due to the even larger rise in medium- and long-term guarantees, dropping from 68.3 % to 63.5 % % of new- 74

75 ly covered short-term business was under wholeturnover policies (in 2003, this was 72.3 %). The number of wholeturnover policies rose markedly again due to the continuing high demand for wholeturnover policies light. The portfolio stands at 908 policies, the highest figure since the beginning of the 90s (2003: 870). The volume of exports covered by wholeturnover policies rose to 8.7 billion EUR. This is the highest ever turnover since the reform of the wholeturnover policies in Premium income was correspondingly at a record level, reaching 55 million EUR. The countries with the highest turnover were once again Brazil, Turkey and Poland with increases between 79 (Brazil) and 134 million EUR (Turkey). The countries with the highest rise in turnover also included Argentina, which moved up from 24 th to 14 th place with a rise of 89 million EUR. The highest turnover in wholeturnover policies light was posted by Russia. Brazil occupies 14 th place. As expected, wholeturnover policies light were frequently used for exports to Central and Eastern Europe. The turnover reported from the exports to the new EU accession countries was 31 %. In all, wholeturnover policies light generated turnover of 62 million EUR. And this is bearing in mind that the number of policies is constantly rising and this type of policy almost certainly still has to reach its final level of turnover. Wholeturnover policies 2004 in millions EUR Brazil Turkey Poland Russia R.F. Mexico Subtotal: 3,023.7m EUR (34.2%) Total: 8,734.0m EUR (100%) Guarantees 2004 by horizon of risk in billions EUR 29.6 % 6.9 % 20.1 % Wholeturnover policies: Revolving policies: Short-term specific policies: 1-5 years: Over 5 years: 2.0 % %

76 Development of export credit guarantees Short-term specific policies 2004 in millions EUR China P.R. Iran Egypt Taiwan Russia R.F. Medium/long-term policies 2004 in millions EUR Iran Russia R.F. Turkey United States United Kingdom Subtotal: 3,470.9m EUR (82.0%) Total: 4,231.7m EUR (100%) Subtotal: 3,812.9m EUR (49.6%) Total: 7,684.8m EUR (100%) 1, ,504.5 Wholeturnover policies are primarily used by companies with insurable turnover between 500,000 EUR and 5 million EUR. The number of policies with a turnover up to 500,000 EUR is meanwhile greater than those with more than 5 million EUR due to the wholeturnover policy light. The volume of revolving specific policies rose by 5.9 % to 416 million EUR. Their share in total cover dropped to a mere 1.9 % after 2.5 % the year before. Short-term specific policies with a credit period up to one year jumped by 61 % from 2.63 billion EUR in 2003 to 4.23 billion EUR. This figure also includes short-term receivables due in respect of progress payments in constructional works contracts. In addition they include cover for capital goods transactions which were financed on short-term conditions although long-term payment would have been permissible. This type of business increased again, especially for covered transactions with China. Although these transactions involve large-scale investment, the projects were handled almost exclusively on short credit terms. The volume of medium/long-term specific policies rose by 51.5 %. Order values stood at just under 7.7 billion EUR after 5.1 billion EUR in the preceding year. The share of total cover was 36.5 %, up from 31.7 % in The countries with the highest turnover were Iran, Russia and Turkey. The reason for this increase is several major transactions in Iran and cover for cruise liners. The share of tied finance credits in the volume of extended-term specific guarantees fell to 80.4 % after 89.5 % one year earlier. 76

77 Numbers of applications/volume of cover Numbers of applications Initial decisions incl. increases Volume of decisions Order values / limits in millions EUR 29,659 27,546 Number/volume of applications, types of goods covered 22,694 23,565 The number of new cover applications in the year under review, including those for increased cover, went down by 7.1 %. The volume subject to decisions, i.e. the sum of order values underlying the applications, rose in contrast by 3.8 %. The number of applications for wholeturnover policies was down both for private and public buyers, while specific policies on private buyers showed an increase of 15.5 %. Specific cover for public buyers slid by 4.8 %. The total number of decisions taken including periodic renewals for offers of cover and requests for modification decreased by 5.0 % to 42,107. New specific policies Number of new specific policies of which for private buyers of which for public buyers Volume in millions EUR of which for private buyers of which for public buyers , ,699 6,168 1,531 1, ,917 8,348 3,569 The number of new short- and medium-term specific policies rose by 11.3 % to 1,242. At the same time the overall volume of underlying orders went up by 54.8 %. The number of major projects with a value in excess of 50 million EUR rose from 25 to 43. These transactions represent 48.5 % (2003: 38.8 %) of the volume of specific cover. The ratio between cover for public and private buyer risks shifted by 1.6 percentage points in favour of public buyers % of specific policies were accounted for by private and 21.3 % by public buyers. In the order values covered, the ratio between private and public buyers was 70.1 % to 29.9 % (2003: 80.1 % private and 19.9 % public buyers). The breakdown of specific policies by types of goods reveals a robust increase in the volume of cover for plant construction (68.4 %). Export credit guarantees for machinery and equipment as well as for aircraft rose by 67 % in each case. The share of guarantees for aircraft reached 10.7 % of overall specific cover or 6.1 % of total business covered. (cf. table in Annex P. 94). 77

78 Development of export credit guarantees Export credit guarantees for ships went up by 29 % and contribute 3.9 % to the total volume of exports. The share of military goods was 0.1 %. Claims and recoveries, rescheduling Claims payments The claims payments made by the Federal Government in 2004 stood at about the same level as in the previous year. With a volume of million EUR they were slightly higher than those in 2003 (514.0 million EUR), yet this cannot be interpreted as a reversal of the trend towards reduced claims observable for several years now. Instead, the claims level is rather stabilizing. The proportion of political to commercial claims has remained steady at just over 20 to just below 80 %. Specific policies 2004 by type of goods in millions EUR 3.0 % 6.8 % 10.7 % 2.0 % 2.5 % 0.5 % 45.1 % Payments for political claims rose again for the first time in four years (15.0 %). The amounts disbursed to the tune of million EUR are moderate in comparison to the 1990s and 2000, however. As already in the previous year, the lion s share of political claims paid out was accounted for by Argentina (70.8 million EUR). This was followed by Zimbabwe (34.2 million EUR) and Pakistan (13.3 million EUR). 9.3 % 20.1 % Plants 5,368 Machinery and equipment 2,397 Electronic, precision engineering and optical equipment, telecommunication 1,109 Ships 815 Vehicles, locomotives 356 Aircraft 1,279 Construction services 234 Other services 301 Various 58 Subtotal: m EUR The volume of claims paid out for commercial risk went up slightly by 7.3 % to reach million EUR. Special non-recurring factors were responsible for this increase, which should not distract attention from the fact that the Federal Government was spared any major commercial claims for the first time in many years. The process of indemnification usually focuses on the due date of the covered instalments. For this reason numerous transactions which had already defaulted in the preceding years continued to be indemnified in the year under review as and when the instalments fell due. Thus especially substantial amounts were indemnified by the Federal 78

79 Government in this year too due to the almost total suspension of payments for the past four years by the APP Group (Asia Pulp & Paper Company) with debtors in Indonesia, Singapore and the PR China, and such payments probably with a diminishing tendency will continue to influence the account during the coming years. The same is true of another claim arising out of a project financing transaction, which has mean- while been regulated. This relates to the construction of a cellulose plant in Indonesia (Musi Pulp). As a result of the bankruptcy of Swiss-Air in 2001 high claims payments were already made to Ireland and Bermuda in recent years. After the instalments which fell due in previous years had been paid as they came up, a concluding indem- Claims payments in millions EUR '00 '01 '02 '03 '04 Political risk claims Commercial risk claims Exchange rate risk claims Total APP restructuring concluded The case of Asia Pulp & Paper Company has already been mentioned several times and has been the subject of intensive activity since early This complicated case involves debt reconstruction for receivables due from the APP Group in Indonesia and the PR China totalling some 14 billion US dollars. Following the finalization of the Master Restructuring Agreement (MRA) for the Indonesian APP companies and its signing by 40 % of the creditors on 30th October 2003, the quorum of 90 % of all creditors required for an out-of-court settlement was reached on , and an initial payment for accrued interest has already been received. 79

80 Development of export credit guarantees Claims payments under commercial risk cover 2003/2004 in millions EUR Indonesia Ireland Bermuda India Brazil Mexico Singapore Argentina China P.R. United Kingdom Claims payments 2004 in millions EUR 77.4 % 0.2 % Political risk claims Commercial risk claims Exchange rate risk claims 22.4 % Recoveries under commercial claims 2004 in millions EUR India Mexico Argentina Belgium Venezuela Indonesia Côte d'ivoire Korea Chile Bermuda Subtotal 2004: 360.1m EUR (83.3%) Total 2004: EUR (100%) Subtotal: 558.5m EUR Subtotal: 155.5m EUR (89.4%) Total: 174.0m EUR (100%) nification in respect of the entire outstanding capital was made in the year under review. This means that inherited claims payments for aircraft business will almost completely cease in the next few years, so that the outlook for commercial claims looks likely to be favourable in Recoveries Recoveries under commercial claims showed an unusually positive development. In all, 174 million EUR were recovered. This considerable rise over the previous year (with recoveries of 78.5 million EUR) is particularly due to the influence of special factors. The Federal Government was able to recover over 62 million EUR from successfully concluded debt reconstructions of defaulting major transactions with companies in the Indonesian steel industry. These recoveries, together with the principal repayment instalments falling due in this year, were generated in the form of high one-off payments (44 million EUR). The significant upturn in the fortunes of the steel industry meant that a restructuring arrangement concluded with a Mexican steelmaker which originally envisaged the repayment of already indemnified receivables up to March 2010, could already be repatriated in full (25 million EUR) in the year under review. 80

81 Revenues 2004 in millions EUR Recoveries for claims paid (excl. interest) in millions EUR under political risk cover thereof rescheduled amounts under commercial risk cover Total '00 '01 '02 '03 ' ,029.3 Russia R.F. Brazil Poland Nigeria Algeria Egypt Gabon Ukraine Pakistan Subtotal: 2,726m EUR (97.5%) Total: 2.796m EUR (100%) 1,764 As in preceding years, additional recoveries under Airbus business were booked from Mexico (6.5 million EUR) and Cote d Ivoire. The fact that the Federal Government successfully regulated various claims in Argentina and Brazil through reaching restructuring and prolongation agreements and through the sale of the machines delivered also contributed to the good recovery result. Debt restructuring agreements in major claims give good reason to expect high recoveries in the coming years, but these are unlikely to reach the level of Rescheduling The positive trend in rescheduling has continued. Payments received from a total of 31 debtor countries stood at 2.8 billion EUR (of which 1.1 billion EUR were capital repayment), thus slightly exceeding the previous year s figure. The Russian Federation once again topped the list of debtors with the highest payments, with some 1.8 billion EUR, followed by Brazil and Poland, each with around 300 million EUR. Nigeria made repeated substantial payments to the Paris Club countries. Within the framework of these payments, Germany received million EUR, but this still leaves Nigeria s outstanding debt, 708 million EUR, at a high level. 81

82 Development of export credit guarantees Iraq The Paris Club signed a multilateral debt rescheduling agreement with Iraq on 21st November This is the largest rescheduling volume after the reschedulings of Russian debt in 1996 and Iraq was granted debt forgiveness as an extraordinary measure. The Paris Club accepted in this context the IMF Emergency Post Conflict Arrangement (EPCA) resolved on 29th September 2004 as the basis for financing this arrangement. The agreement is based on the Evian conditions, which were newly fixed in 2003 and foresee an IMF debt sustainability analysis as the prerequisite for rescheduling. This showed that, despite the oil reserves it possesses, Iraq can only successfully reconstruct its economy with far-reaching debt forgiveness. The agreement therefore stipulates debt forgiveness of 80 %, reducing the total debt of 39 billion US dollars to 8 billion US dollars. The volume of trade receivables covered by the German government is 4.9 billion EUR, and debt due to the former GDR to the tune of 1 billion EUR is also included in the arrangement. The Federal Republic of Germany, together with Japan, France, Russia and the USA, is one of Iraq s largest creditors. The forgiveness of a total of 80 % of the capital and interest debt as per 1st January 2005 is to be made in three phases. 30% will be forgiven with effect from 1st January 2005 by waiving the right to receive late interest on the debt. This reduces the volume of covered German trade receivables (originally some 4.9 billion EUR, of which 3 billion EUR were late interest) by some 1.5 billion EUR. Increasing forgiveness to 60 % of outstanding debt is planned already for 2005 in conjunction with an IMF programme to be completed over a number of years. The forgiveness of 50 % of the remaining balance (20 % of the original total) is envisaged for 2008 at the latest, provided that the IMF acknowledges the successful implementation of the 3-year programme. Iraq is exempted from all payments during a grace period lasting till The creditor countries can choose from two options according to the Paris Protocol for the implementation of the second stage of forgiveness (42.85 % of the remaining balance). These are: direct forgiveness of the debt amount charging interest at market rates on the remaining outstanding debt (the debt reduction option) or a longer-term repayment of the nominally unchanged balance of the debt at a reduced interest rate (the debt service reduction option). The third stage of forgiveness will be implemented either as direct forgiveness or, in the case of debt service reduction, as partial debt relief on the instalment in question falling due. The bilateral rescheduling agreement is still in the process of being concluded, in particular due to the necessity to carry out a large-scale debt reconciliation process with the Iraqi government. The effects of the tsunami disaster in South Asia The Paris Club discussed the effects of the tsunami disaster in South Asia at its first meeting in January Based on a joint German/ French initiative, the creditor countries agreed on a payment moratorium for the countries affected. 82

83 This covers payment obligations of governments or the public sector, without taking the private sector into account. Only Sri Lanka and Indonesia will make use of the support measures on offer. Russian Federation the ARIES transaction In mid-2004 rescheduled debt of the Russian Federation due to Germany in the amount of some 5 billion EUR was securitized as a public bond issue in an innovative transaction and placed on the capital market. This process, known as the Aries transaction, was named after the special-purpose vehicle charged with handling the securitization. The goal of this transaction, which involves something like a third of the total Russian debt due to the Federal Government, was to generate an immediate cashflow through securitizing the debt instead of halfyearly principal and interest payments over a long period, as well as transferring part of the credit risk towards the Russian Federation to the capital market. The Russian Federation s payment obligations under rescheduling agreements remain unaffected by this transaction. Some 150 exporters participated in the transaction with a volume of 27.5 million EUR on the same conditions as the Federal Government. Russian Federation early repayments The Russian Federation intends to repay part of its payment obligations towards its Paris Club creditors before the official maturity through a debt buy-back arrangement. Negotiations started between Russia and the Paris Club on the modalities of this project at the beginning of After its accession to the European Union Poland, too, had offered to repay its debt to the Paris Club countries amounting to some 10 billion EUR before maturity and did so at the end of March Argentina The Argentine government utilized 2004 to make progress on the rescheduling of Argentine government bonds. These account for some two thirds of total public debt of c. 150 billion US dollars, and there has been no debt service since the beginning of The Argentine offer concerning debt restructuring was accepted by 76 % of the private creditors. This regulates the restructuring for about 62 billion US dollars (nominal). It remains to be seen when rescheduling negotiations begin between the Paris Club creditors and Argentina in respect of their debts. 83

84 Development of export credit guarantees Volume of multilateral reschedulings 2004 in million US-Dollar Rescheduling agreements The Paris Club concluded multilateral debt agreements with 20 countries with a total volume of some 51.5 billion US dollars. Iraq accounted for by far the greatest share of this, with almost 39 billion US dollars. Besides debt forgiveness to the tune of 31 billion US dollars for Iraq, further forgiveness of around 6.5 billion US dollars for the highly indebted poor countries is envisaged (additional bilateral debt forgiveness measures are not included in this sum). Kenya and Georgia with a rescheduling volume of 353 million and 161 million US dollars respectively received rescheduling agreements on socalled Houston conditions. This entails agreeing the repayment of trade debt over a period of 15 to 20 years without forgiveness, including a grace period of 5 years. The bilateral rescheduling agreement with Kenya was signed in October Iraq Congo Nicaragua Ghana Ethiopia Madagascar Gabon 38, , , , , , Subtotal: 48,449.0m US-Dollar (94.1%) Total: 51,472.6m US-Dollar (100%) Gabon received rescheduling for debts amounting to some 850 million US dollars. The corresponding bilateral agreement involving a volume of some 74 million EUR of trade receivables was signed at the end of February The Dominican Republic is still struggling with liquidity problems following the national banking crisis. The rescheduling of transactions with a contract date prior to , with a volume of just under 200 million US dollars, was intended to buttress the IMF emergency programme with support from the Paris Club. After a further IMF programme was agreed on , it is expected that a further rescheduling agreement with the Dominican Republic will be scheduled for April at the Paris Club. 84

85 Share of HIPCs and non-hipcs in volume of multilateral reschedulings 2004 in millions US-Dollar German share in volume of multilateral reschedulings 2004 in millions EUR 9.0 % 15.0 % Iraq Nicaragua Congo Gabon Ethiopia Madagascar Ghana Subtotal: 6,374.1m EUR (96.3%) Total: 6,617.5m EUR (100%) 5, % extended HIPC-Initiative: Iraq: other conditions: Total: 51,472.6m US-Dollar 7, , ,657.6 In the year under review the Federal Republic of Germany signed nine bilateral rescheduling agreements with a total trade debt volume of 322 million EUR, which in most cases implemented multilateral agreements concluded in the previous year. ity of the Paris Club creditors grant complete forgiveness of debt bilaterally. In agreements concluded in the year under review Germany forgives bilaterally trade debts to the tune of million EUR. With a share of million EUR, Nicaragua was the beneficiary of the largest single debt forgiveness under the HIPC Initiative. The HIPC initiative Up to the end of the year under review, 15 countries had reached the completion point under the Expanded HIPC Initiative to discharge the debt of the Heavily Indebted Poor Countries and thus qualified for comprehensive debt forgiveness by their bilateral creditors. The overwhelming major- 85

86 Profit and loss account Revenues Revenues from the export credit guarantees went up by 11.8 % in the year under review to 2.7 billion EUR. This sum can be broken down as follows: Premiums and fees received rose by 5.2 % to million EUR. The lower increase in income from premium is attributable to special effects which caused a particularly high rise in the premium income for The recoveries in respect of already indemnified claims and above all the debt repayment under rescheduling agreements in a total amount of 1,029.3 million EUR must be added to the premium income an increase of 29.1 %. 86

87 In addition, there was interest income, which totalled 1,203.3 million EUR in 2004 (2003: 1,173 million EUR). In an amount of 1,201.1 million EUR, this was generated almost entirely by rescheduling agreements. The lion s share of this, 61.2 %, came from Russia. Revenues 2004 in millions EUR 38.0 % 44.5 % Expenses Expenses rose during the year under review by 8.1 % to reach million EUR. In addition to claims payments totalling million EUR there were costs for the administration and handling of the export credit guarantee scheme of 65.6 million EUR. Financial result With a cash surplus of million EUR, the export credit guarantees of the Federal Republic of Germany posted its best ever positive result in 2004, up 31.2 % over the previous all-time high in the preceding year. This confirms the reversed trend of recent years which returned the scheme to black figures for the first time in 1999 with a positive result of 110 million EUR after 16 years of running a deficit. This year s positive result has reduced the negative balance accrued to date by the scheme to 11.0 billion EUR. The good result is exclusively due, however, to the high amounts recovered under rescheduling agreements. Interest of 1,203.3 million EUR was booked, mostly under rescheduling agreements. For methodical reasons this is routinely excluded when calculating the financial result, since the refinancing costs incurred by the Federal Government in respect of claims paid are also not included % Amortisation and recoveries: 1,029.3 Premium/fees earned: Interest received: 1,203.3 Exchange gains: 0.0 Total: 2,705.4m EUR Highest interest payments under rescheduling agreements in 2004 in millions EUR Russia (FSU) Nigeria Poland Brazil Algeria Subtotal: 1,105.3m EUR (91.9%) Total: 1,102.3m EUR (100%) Financial result in millions EUR 1, ,284 1,173 1,203 1,120 '97 '98 '99 '00 '01 '02 '03 '04 Interest received Cash deficit/ Surplus

88 Export guarantee portfolio Statutory cover limit, total commitment level and total outstanding risk A statutory cover limit is set every year in the Budget Law which stipulates the maximum aggregate amount of cover available for export credit guarantees and tied finance credits to foreign debtors. The Federal Securities Administration monitors the utilization of the statutory cover limit, registers the maximum amounts for which it accepts liability and deletes expired commitments. Cover granted for interest is not set off against the statutory limit. As in 2003, the statu- 88