REPORT ON BEST PRACTICES IN EXPORT FINANCING Prepared by Maria Kovesdi
UNDP Aid for Trade Project in Ukraine Ukraine, Kyiv, 01021, 1/14 Sadova St., 4th floor Tel.: +38044 2535866, 2535869. Fax: +38044 2535611
This report has been prepared within the UNDP Aid for Trade project in Ukraine. The views or recommendations expressed in this report are those of the author and do not necessarily represent those of the United Nations Development Programme, any other UN agency or the Ministry for Foreign Affairs of Finland
CONCEPTUAL FRAMEWORK OF EXPORT FINANCING ...............................5 1.1. Introduction...........................................................................................5 1.2. Typology of Trade Finance Facilities ..........................................................6 1.3. Organizations involved in regulatory and monitoring environment of the trade finance system ..............................................................................8
ANALYSIS OF WTO RESTRICTIONS TO ESTABLISHMENT OF EXPORT FINANCING SCHEMES ............................................................................12 2.1. WTO’s involvement in trade finance as an institution...............................12 2.2. Analysis of WTO Agreement on Subsidies and Countervailing Measures with special view to export finance system .............................................13
OVERVIEW OF EXPORT FINANCING MODELS IN SPAIN, HUNGARY AND SLOVAKIA: INSTITUTIONAL ARRANGEMENTS, REGULATIONS, AND IMPACT. ..........................................................................................20 3.1. 3.2. 3.3. 3.3.
Introduction.........................................................................................20 The case of Spain ..................................................................................23 The case of Hungary ..............................................................................48 The case of Slovakia ..............................................................................71
4. ANALYSIS OF BEST PRACTICES IN EXPORT FINANCING WHICH COULD BE EXPECTED TO WORK IN UKRAINE.....................................................87 4.1. Situation of Export Finance System in Ukraine ........................................87 4.2. Best practices of SMEs export support....................................................92 5.
STRATEGIC RECOMMENDATIONS FOR UKRAINE BASED ON BEST PRACTICES .............................................................................................99
0. INTRODUCTION Better integration into international trade plays an important role in global efforts to reduce poverty. Increasing exports provides new opportunities for enterprises to expand their production and to create more and better jobs. Exports are a vital source of income to finance the import of goods and services that a country does not produce itself. Trade is an essential source of sustainable economic growth, has important impact on job creation, peoples’ income and poverty alleviation. Assessments of growth point to an understanding that the rate at which countries grow is substantially determined by •
their ability to integrate with the global economy through trade and investment;
their capacity to maintain sustainable government finances and sound money;
their ability to put in place an institutional environment in which contracts can be enforced and property rights can be established.
As globalization proceeds, transition countries and their enterprises face major challenges for strengthening their human and institutional capacities to take advantage of trade and investment opportunities. While governments make policies in trade and investment areas, their enterprises trade and invest. Therefore, supply-side bottlenecks in the trade and investment areas and the manner how governments, development partners and the private sector itself manage these constraints have direct implications on the economic growth potential of transition countries. SMEs play a key role in transition countries. These firms typically represent the majority of all firms and constitute a major source of employment and generate significant domestic and export earnings. As such, SME development emerges as a key instrument in poverty reduction efforts. Globalization and trade liberalization have ushered in new opportunities as well as challenges for SMEs. Presently, only a small part of the SME sector is able to identify and exploit these opportunities and deal with the challenges. The majority of SMEs in transition countries, however, has been less able or unable to exploit the benefits of globalization and is frequently under pressure on the local or domestic markets from cheaper imports and foreign competition. SMEs, due to their size, are particularly constrained by non-competitive real exchange rates, limited access to finance, cumbersome bureaucratic procedures in setting up, operating and growing a business, poor state of infrastructure and lack of effective institutional structures. The removal of these constraints is a daunting task calling for holistic SME support, i.e. an enabling environment for SME development consisting of functioning macro, meso and micro level institutions. The volatility in the markets and the worldwide combination of growth and crisis since 2008 has created a challenging environment – especially for export credit finance, and the uncertainty, in both the European economy and in the global trade environment, still prevails. The Aid for Trade Project for Ukraine (Phase II) is implemented within the UNDP’s regional Aid for Trade project ‘Aid for Trade for Central Asia, South Caucasus and Western CIS: Promoting Trade Development and Poverty Reduction in Partnership with Finland’s Wider Europe Initiative,’ financed by the Government of Finland.
The purpose of the project is to improve the implementation of pro-poor trade-related policy reforms and trade capacity development measures on the national and local levels. More specifically, the project aims to facilitate international trade on the national and local level by supporting the development of strategic documents to promote trade, optimizing the institutional framework, and providing technical assistance to exporters. The need to establish state export financing system, as an instrument of SME export promotion, has been clearly articulated in the National Action Plan of Ukraine to implement the Presidential Program of Reforms for 2010-2014. To this end the UNDP has requested to prepare this report on best practices in export financing in order to identify the most costeffective approaches to be applied in Ukraine. This paper describes in section I the conceptual framework of export trade finance, in order to clarify the terms used in this report. Section II looks at the WTO regulations concerning the export financing system, while section III presents export financing models focused on SMEs in three countries, including Spain, and two recently acceded EU member-states with a particular focus on operation of Export Credit Agencies (institutional arrangements, regulations, impact). Section IV discusses in details best practices in export financing which could be expected to work in Ukraine, depending on the political will and on the development of the local financial systemâ€™s capacity to handle them efficiently. And Section V gives strategic recommendations based on best practices. The products and programs specially designed for SMEs are indicated by blue letters thorought the report.
1. Conceptual Framework of Export Financing 1.1. Introduction The expansion of trade depends on reliable, adequate, and cost-effective sources of financing, both long-term (for capital investment needed to produce tradeable goods and services) and short-term, in particular trade finance. 1 The trade finance market has several segments according to maturity, from short-term (usually 0 to 180 days, but possibly to 360 days) to medium and long-term. The medium to longterm end is generally considered to be over two years, and is subject to the OECD Arrangement on Guidelines for Officially Supported Exported Credits (the Arrangement) when insured or guaranteed by a Participant to the Arrangement. The latter is the basis on which the large majority of world trade operates, as there is generally a time-lag between when goods are produced, then shipped and finally when payment is received. Trade-finance can provide credit, generally up to 180-days, to enterprises to fill this gap. The availability of trade finance, particularly in developing and transition countries, plays a crucial role in facilitating international trade. Exporters with limited access to working capital often require financing to process or manufacture products before receiving payments. Conversely, importers often need credit to buy raw materials, goods and equipment from overseas. The need for trade finance is underlined by the fact that competition for export contracts is often based on the attractiveness of the payment terms offered, with stronger importers preferring to buy on an open account basis with extended terms as compared to stronger exporters who prefer to sell on a cash basis, or secured basis if extended terms are needed. A number of common trade financing instruments have been developed to cater to this need. In addition to securing adequate finance, exporters face a number of additional risks including non payment by the buyer or importer for insolvency or political reasons, as well as foreign exchange fluctuation (FX) risk. In developed countries and some developing and transition countries, insurance provided by export credit agencies (ECAs) on behalf of the state (official export credit) or by private sector insurance companies can cover non payment risks, while banks can help with other risks.
Improving the Availability of Trade Finance during Financial Crises http://www.wto.org/english/res_e/booksp_e/discussion_papers2_e.pdf
1.2. Typology of Trade Finance Facilities 1.2.1. Trade Finance Instruments A) Trade Finance provided by banks a)
A bank may extend credit to an importing company, and thereby commit to pay the exporter. Under a letter of credit issued by the bank, payment will usually be made upon the presentation of stipulated documents, such as shipping and insurance documents as well as commercial invoices (Documentary Credit), or at a later specified date.
A bank may extend short-term loans, discount letters of credit or provide advance payment bonds for the exporter, to ensure that the company has sufficient working capital for the period before shipment of the goods, and that the company can bridge the period between shipping the goods and receiving payment from the importer (Pre and Postshipping Financing).
To assist an exporter, a bank in the exporting country may extend a loan to a foreign buyer to finance the purchase of exports. This arrangement allows the buyer extended time to pay the seller under the contract (Buyer's Credit).
Trade Finance facilities provided by banks to importers and exporters can include the provision of: •
Working capital loans or overdraft,
Issuing performance, bid and advance payment bonds,
Opening letters of credit (L/Cs),
Accepting and confirming L/Cs,
Such facilities are usually denominated in hard currencies, with the possible exception of the working capital loan or overdraft. B) Other forms of financing Without the intermediary role of banks, companies may also use other instruments to finance their transactions, including: •
Bills of Exchange, by which an exporter can get an undertaking from the importer to pay at a specified future date, as well as
Promissory Notes, in which an importer promises to pay at a future date, but which offer less legal protection than Bills of Exchange.
The exporting company may extend credit directly to the buyer in the importing country, again to allow the buyer time to pay the seller under the contract (Supplier's Credit).
The exporter sells receivables without recourse at a discounted rate to a specialized house, the receivables becoming a tradable security (Forfaiting).
Exchange of valued goods at an agreed value without cash or credit terms, involving a barter-exchange, counterpurchase, or buy-back (Counter-trade).
1.2.2. Export and Trade Credit Insurance and Guarantees A)
Non Payment or Commercial risk
ECAs and insurance companies offer short-term export or trade credit insurance at market rates covering both pre- and post-shipment periods. These insurance contracts cover the risk of insolvency of the buyer. Many of these insurers also offer insurance or guarantees for medium- and long-term buyer and supplier credit transactions, which in OECD member countries should comply with the OECD Agreement. While this cover may be of less importance in guaranteeing the maintenance of crucial trade flows during short periods of financial crises, such medium and long term export credit is important for developing and least-developed countries needing new and updated technology and capital goods. The cost of insurance is determined both by the terms of the contract (proportion of the exposure covered and length of the transaction), as well as the risk associated with the insured party. For medium and long export credit covered by a participant to the OECD Arrangement, minimum premiums apply. A letter of credit (L/C) issued by an importerâ€™s bank is probably the best way for an exporter to mitigate non payment risk. However, this does not protect the exporter from failure by the issuing bank to meet its obligations to pay under the L/C. In this case the exporterâ€™s bank could be asked to confirm the L/C and hence take the risk of the issuing bank. B)
Export or trade credit insurance can also cover a variety of political risks, including currency non-convertibility and transfer restrictions, confiscation or expropriation, import license cancellation, breach of contract by a government buyer, and political violence which cause the non payment by a buyer. For long-term buyer credit and project finance transactions, political risk insurance (PRI) can play a critical role in mobilizing foreign direct investment for developing and least-developed countries. However, in the wake of the actual financial crisis since 2008, it has become more difficult for the insurance market to offer PRI for the longer tenures and larger amounts needed to support foreign direct investment into developing and least-developed countries. Because of this, collaboration between official ECAs, multilateral development banks and private sector insurance companies has substantially increased during the past few years and needs to be encouraged. C)
Foreign Exchange risk
Exchange rate fluctuation risk between major traded currencies can be minimized through a hedging operation by taking a reverse position in the forward market or using options (to buy or to sell) foreign exchange in the futures market. These operations are available at a relatively low fee (about 0.3 per cent depending on amount and currency) plus the price of the option. But for importers and exporters in developing and some transition countries that do not have freely traded currencies or efficient FX markets, these operations can be too costly or simply not available.
Commercial insurance is available to cover freight-related losses for a determinate percentage of the freight value and transportation costs depending on the risk and destination.
1.3. Organizations involved in regulatory and monitoring environment of the trade finance system The WTO’s fundamental rules within the World Trade Organization on subsidies and balancing measures will be analyzed in the next chapter, however other organizations as for example the OECD and the EU have a great influence on trade finance system with the object of harmonizing the national systems for export financing. Although the analysis of these institutions is not the purpose of this report a very brief presentation could be helpful for further analyses.
Organization for Economic Co-operation and Development The OECD Consensus Most of the OECD countries, together with all EU member states, co-operate within the framework of the Arrangement on Officially Supported Export Credits, also called the Consensus. This agreement regulates payment conditions, interest rates and premiums for state export financing and consultations between the countries. The object of the agreement, which is being gradually developed, is to promote a proper use of state export credits and to create equal competitive conditions for exporters and financiers in different countries. The EU Commission represents EU countries in OECD negotiations on issues that are included in the agreement. Member states meet regularly for purpose of co-ordination within the EU’s advisory working group for export credits. Environmental issues The OECD countries also co-operate on guidelines called the Recommendation on Common Approaches on Environment and Officially Support Export Credits. The OECD’s working group for export credits and guarantees regularly follows up and develops the guidelines and their application. 2 To combat corruption Another area of co-operation is corruption where OECD members have agreed on a common policy and procedures in the form of OECD Recommendation on Bribery and Officially Supported Export Credits. The OECD countries continually follow up and develop this policy. 3 To help HIPCs The OECD countries have also agreed on a statement of principles regarding export credits to HIPCs – Official Export Credit Support for Heavily Indebted Poor Countries – Statement of Principles. 4 2 3
For more detailed information see http://www.oecd.org/department/0,3355,en_2649_34181_1_1_1_1_1,00.html For more detailed information see http://www.oecd.org/department/0,3355,en_2649_34177_1_1_1_1_1,00.html
Dialogue The OECD countries regularly engage in a dialogue with interested parties, that is to say, independent organizations, countries outside the OECD, exporters and financiers as well as international financial institutions.
The European Union In the case of EU member states, the directive on the harmonization of medium- and long-term guarantees, which lays down the main rules for state credit insurance for medium- and longterm export transactions, applies. The directive also calls for exchange of information among EU countries. The EU’s competition rules on marketable risks exclude state export credit insurance for shortterm risks in OECD countries. Marketable risks are defined as risks on buyers/debtors established in the EU countries, Canada, Iceland, Japan, New Zeeland, Norway, Switzerland and the United States. The European Commission reviews these regulations on a regular basis in light of developments on the private insurance market. Within the EU there are also rules on co-ordinated guarantees, overseas sub-contractors, cooperation agreements with other countries and consultations between member states. Compliance with the OECD Arrangement is incorporated into EU Community law and is therefore mandatory for all EU member countries as a result of Council Decision 93/112/EEC (as amended by Decision 97/530/EC). The European Commission, in particular DG Trade, plays a role in the harmonization of ECAs and the co-ordination of policy statements and negotiation positions as a result of Council Decisions 73/391/EEC and 76/641/EEC. These decisions provide for prior consultations among member states on long term export credits. Member states may ask each other if they are considering finance of a specific transaction with official export credit support. “Officially” EU members may not provide public sources for finance of intra-EU exports, despite this and corcening specially to short-term export finance of small and medium companies, due to the unavailable or insufficient cover in the majority of Member States of export-credit insurance offered by private insurers to SMEs 5 with a limited export turnover, which is caused by no or very low profitability reflecting an insufficient spread of foreign countries/buyers and lack of education and knowledge of the complexities of export credit insurance among SMEs, entailing significant handholding and processing costs, the Commission considers their export-related risks as temporarily ‘nonmarketable’. In those Member States where there is no adequate offer by the private market, also in consideration of the need for the commercial insurers to adapt to the increased market size created by the EU enlargement, the Commission could extend SME policy license which allows the Export Credit Agency of a 4
For more detailed information see http://www.oecd.org/department/0,3355,en_2649_34179_1_1_1_1_1,00.html
For more detailed information see http://ec.europa.eu/trade/creating-opportunities/trade topics/exportcredits/index_en.htm Official Journal C 325, 22/12/2005 P. 0022 – 0023. Use of escape clause for SMEs defined. 22 December 2005.
Member Country on behalf of the State to take over the export risks of small and mediumsized companies, enabling them to reach new export markets and financing their export activities. (Escape clause for SMEs).
The Berne Union
The Berne Union (the International Union of Credit and Investment Insurers) is an association of 49 members from all parts of the world. The Berne Union facilitates the exchange of information and knowledge relating to risk assessment, product development and other important areas of interest to export credit insurers. The Berne Union has also adopted the Berne Union Value Statement, which emphasizes the importance of sound principles, transparency and high ethical standards within international trade. Ukraine is member of the Prague Club of the Berne Union. The Berne Union Prague Club is an information exchange network for new and maturing insurers of export credit and investment.
1.3.4. The Paris Club The Paris Club is the forum where public and state-guaranteed credits are renegotiated when a country has such serious payment problems that it is unable to repay its debts. At Paris Club meetings the debtor country and the creditor countries involved negotiate a framework agreement. This agreement lays down the principles for which debt payments can be deferred until later and outlines a new payment plan for them.
1.3.5 Cooperation between Export Credit Agencies In most countries in the OECD – and in many developing countries – there are export credit agencies, whose role is to promote their countries’ exports. They are run either, by the government, or by private insurance companies with government backing. Some of the agencies, confine themselves to issuing guarantees (equivalent to insurance), whilst others also offer export financing facilities. Co-operation agreements between export credit agencies National export credit agencies co-operate in a variety of different ways. Reinsurance agreements and joint guarantee arrangements are the most frequently used. Reinsurance Reinsurance is appropriate when a main supplier makes purchases on firm account from one or more foreign sub-contractors. The agreement is made between the main supplier and the endbuyer, who is domiciled in a different country from any of the sub-contractors. The purpose of a reinsurance agreement is to share the risk with the export credit agency in the country of the sub-contractor. This does not require any extra input by the exporter, who applies for a guarantee in the normal way. The Export Credit Agency of the main supplier decides whether to reinsure the guarantee. The guarantee issued by the Export Credit Agency of the sub-contractor which also pays indemnification, should it become necessary.
The Basel Committee on Banking Supervision provides a forum for regular cooperation on banking supervisory matters. Its objective is to enhance understanding of key supervisory issues and improve the quality of banking supervision worldwide. It seeks to do so by exchanging information on national supervisory issues, approaches and techniques, with a view to promoting common understanding. At times, the Committee uses this common understanding to develop guidelines and supervisory standards in areas where they are considered desirable. In this regard, the Committee is best known for its international standards on capital adequacy; the Core Principles for Effective Banking Supervision; and the Concordat on cross-border banking supervision. Basel III The Basel Committee on Banking Supervision introduced measures to strengthen the regulation, supervision, risk management and capital requirements of the banking sector in response to the financial crisis of 2008. The â€˜Basel IIIâ€™ regulation will raise capital requirements for banks, thus strengthening the stability of the global financial system. The new rules will affect mostly smaller financial institutions and, as a result, credit conditions for small and medium-sized companies. Non-bank financial institutions, such as investment banks and hedge funds, will play an increasingly active role (as the new provisions do not concern them), raising the risks associated with this sector. New rules on trade financing are likely to result in tighter trade credit conditions, encouraging companies to use less secure instruments. As trade credit conditions tighten, country risk information is set to become even more essential to companies dealing with foreign counterparties.
Analysis of WTO Restrictions to Establishment of Export Financing Schemes
2.1. WTO’s involvement in trade finance as an institution Since 80 to 90% of trade transactions involve some form of credit, insurance or guarantee, trade finance is often pictured as the lifeblood of trade. Producers and traders in both developed and developing countries need to have access to affordable flows of trade financing and insurance to be able to import and export, and hence integrate in world trade. From that perspective, an efficient financial system, which properly allocates deposits and savings towards efficient uses – including safe and highly collateralized lending such as trade finance is a key condition to allow trade to happen. The WTO has been following actively, and at times, directly supporting, initiatives to boost the availability of trade finance in developing and least-developed countries. Since the WTO is not a financial institution, it has been supporting in the past few years partners engaged in this effort such as international financial institutions, export credit agencies, large commercial banks, and regional development banks. The WTO is naturally interested in monitoring and advocating for access to appropriately priced trade finance. It does so in the context of the WTO Director-General’s Expert Group on Trade Finance, which convenes in an informal way the main public institutions (WTO, IMF, World Bank and other multilateral development banks), the Berne Union and market-making banks to exchange information and ideas to this aim. The WTO’s partners share the same interest in seeing the world’s trade finance market functioning properly, to support the expansion of global trade. The WTO reports on these exchanges and related initiatives, to both WTO members (the WTO Working Group on Trade, Debt and Finance) and the G-20. The WTO also regulates some aspects of the activities of export credit agencies through the WTO’s Agreement on Subsidies and Countervailing Measures (SCM Agreement).
2.2. Analysis of WTO Agreement on Subsidies and Countervailing Measures with special view to export finance system The implications of the Agreement on Subsidies and Countervailing Measures have to be carefully examined. The disciplines of the SCM Agreement apply also to subsidies provided through the financial system, including the provision by a government or public body (e.g. through a central bank or ECA) of export credit, insurance and guarantees. The Agreement on Subsidies and Countervailing Measures (“SCM Agreement”) addresses two separate but closely related topics: multilateral disciplines regulating the provision of subsidies, and the use of countervailing measures to offset injury caused by subsidized imports. Multilateral disciplines are the rules regarding whether or not a subsidy may be provided by a Member. They are enforced through invocation of the WTO dispute settlement mechanism. Countervailing duties are a unilateral instrument, which may be applied by a Member after an investigation by that Member and a determination that the criteria set forth in the SCM Agreement are satisfied.
2.2.1 Structure and Content of Agreement The Agreement on Subsidies and Countervailing Measures (“SCM Agreement”) is a document of 41 pages and consists of eleven Parts, thirty two Articles and seven annexes (enclosed to this report). Part I provides that the SCM Agreement applies only to subsidies that are specifically provided to an enterprise or industry or group of enterprises or industries, and defines both the term “subsidy” and the concept of “specificity.” Parts II and III divide all specific subsidies into one of two categories: prohibited and actionable, and establish certain rules and procedures with respect to each category. 6 Part V establishes the substantive and procedural requirements that must be fulfilled before a Member may apply a countervailing measure against subsidized imports. Parts VI and VII establish the institutional structure and notification/surveillance modalities for implementation of the SCM Agreement. Part VIII contains special and differential treatment rules for various categories of developing country Members. Part IX contains transition rules for developed country and former centrally-planned economy Members. Parts X and XI contain dispute settlement and final provisions. Coverage of Agreement Part I of the Agreement defines the coverage of the Agreement. Specifically, it establishes a definition of the term “subsidy” and an explanation of the concept of “specificity”. Only a measure which is a “specific subsidy” within the meaning of Part I is subject to multilateral disciplines and can be subject to countervailing measures. Definition of subsidy
It is worth to know, that the Agreement as it originally entered into force contained a third category, the non-actionable subsidies, described in part IV, which is actually an invalid definition.
Unlike the Tokyo Round Subsidies Code, the WTO SCM Agreement contains a definition of the term “subsidy”. The definition contains three basic elements: (i) a financial contribution (ii) by a government or any public body within the territory of a Member (iii) which confers a benefit. All three of these elements must be satisfied in order for a subsidy to exist. The concept of “financial contribution” was included in the SCM Agreement only after a protracted negotiation. Some Members argued that there could be no subsidy unless there was a charge on the public account. Other Members considered that forms of government intervention that did not involve an expense to the government nevertheless distorted competition and should thus be considered to be subsidies. The SCM Agreement basically adopted the former approach. The Agreement requires a financial contribution and contains a list of the types of measures that represent a financial contribution, e.g., grants, loans, equity infusions, loan guarantees, fiscal incentives, the provision of goods or services, the purchase of goods. In order for a financial contribution to be a subsidy, it must be made by or at the direction of a government or any public body within the territory of a Member. Thus, the SCM Agreement applies not only to measures of national governments, but also to measures of sub-national governments and of such public bodies as state-owned companies. A financial contribution by a government is not a subsidy unless it confers a “benefit.” In many cases, as in the case of a cash grant, the existence of a benefit and its valuation will be clear. In some cases, however, the issue of benefit will be more complex. For example, when does a loan, an equity infusion or the purchase by a government of a good confer a benefit? Although the SCM Agreement does not provide complete guidance on these issues, the Appellate Body has ruled (Canada – Aircraft) that the existence of a benefit is to be determined by comparison with the market-place (i.e., on the basis of what the recipient could have received in the market). In the context of countervailing duties, Article 14 of the SCM Agreement provides some guidance with respect to determining whether certain types of measures confer a benefit the context of multilateral disciplines, however, the issue of the meaning of “benefit” is not fully resolved. Specificity Assuming that a measure is a subsidy within the meaning of the SCM Agreement, it nevertheless is not subject to the SCM Agreement unless it has been specifically provided to an enterprise or industry or group of enterprises or industries. The basic principle is that a subsidy that distorts the allocation of resources within an economy should be subject to discipline. Where a subsidy is widely available within an economy, such a distortion in the allocation of resources is presumed not to occur. Thus, only “specific” subsidies are subject to the SCM Agreement disciplines. There are four types of “specificity” within the meaning of the SCM Agreement: •
Enterprise-specificity. A government targets a particular company or companies for subsidization;
Industry-specificity. A government targets a particular sector or sectors for subsidization.
Regional specificity. A government targets producers in specified parts of its territory for subsidization.
Prohibited subsidies. A government targets export goods or goods using domestic inputs for subsidization.
Categories of Subsidies The SCM Agreement creates two basic categories of subsidies: those that are prohibited, those that are actionable (i.e., subject to challenge in the WTO or to countervailing measures). All specific subsidies fall into one of these categories. A) Prohibited subsidies Two categories of subsidies are prohibited by Article 3 of the SCM Agreement. The first category consists of subsidies contingent, in law or in fact, whether wholly or as one of several conditions, on export performance (“export subsidies”). A detailed list of export subsidies is annexed to the SCM Agreement. The second category consists of subsidies contingent, whether solely or as one of several other conditions, upon the use of domestic over imported goods (“local content subsidies”). These two categories of subsidies are prohibited because they are designed to directly affect trade and thus are most likely to have adverse effects on the interests of other Members. The scope of these prohibitions is relatively narrow. Developed countries had already accepted the prohibition on export subsidies under the Tokyo Round SCM Agreement, and local content subsidies of the type prohibited by the SCM Agreement were already inconsistent with Article III of the GATT 1947. What is most significant about the new Agreement in this area is the extension of the obligations to developing country Members subject to specified transition rules (see section below on special and differential treatment), as well as the creation in Article 4 of the SCM Agreement of a rapid (three-month) dispute settlement mechanism for complaints regarding prohibited subsidies. B) Actionable subsidies Most subsidies, such as production subsidies, fall in the “actionable” category. Actionable subsidies are not prohibited. However, they are subject to challenge, either through multilateral dispute settlement or through countervailing action, in the event that they cause adverse effects to the interests of another Member. There are three types of adverse effects. First, there is injury to a domestic industry caused by subsidized imports in the territory of the complaining Member. This is the sole basis for countervailing action. Second, there is serious prejudice. Serious prejudice usually arises as a result of adverse effects (e.g., export displacement) in the market of the subsidizing Member or in a third country market. Thus, unlike injury, it can serve as the basis for a complaint related to harm to a Member's export interests. Finally, there is nullification or impairment of benefits accruing under the GATT 1994. Nullification or impairment arises most typically where the improved market access presumed to flow from a bound tariff reduction is undercut by subsidization. The creation of a system of multilateral remedies that allows Members to challenge subsidies which give rise to adverse effects represents a major advance over the pre-WTO regime. The difficulty, however, will remain the need in most cases for a complaining Member to demonstrate the adverse trade effects arising from subsidization, a fact-intensive analysis that panels may find difficult in some cases. C) Agricultural subsidies Article 13 of the Agreement on Agriculture establishes, during the implementation period specified in that Agreement (until 1 January 2003), special rules regarding subsidies for agricultural products. Export subsidies which are in full conformity with the Agriculture Agreement are not prohibited by the SCM Agreement, although they remain countervailable.
Domestic supports which are in full conformity with the Agriculture Agreement are not actionable multilaterally, although they also may be subject to countervailing duties. Finally, domestic supports within the “green box” of the Agriculture Agreement are not actionable multilaterally nor are they subject to countervailing measures. After the implementation period, the SCM Agreement shall apply to subsidies for agricultural products subject to the provisions of the Agreement on Agriculture, as set forth in its Article 21. Countervailing Measures Part V of the SCM Agreement sets forth certain substantive requirements that must be fulfilled in order to impose a countervailing measure, as well as in-depth procedural requirements regarding the conduct of a countervailing investigation and the imposition and maintenance in place of countervailing measures. A failure to respect either the substantive or procedural requirements of Part V can be taken to dispute settlement and may be the basis for invalidation of the measure. Substantive rules A Member may not impose a countervailing measure unless it determines that there are subsidized imports, injury to a domestic industry, and a causal link between the subsidized imports and the injury. As previously noted, the existence of a specific subsidy must be determined in accordance with the criteria in Part I of the Agreement. However, the criteria regarding injury and causation are found in Part V. One significant development of the new SCM Agreement in this area is the explicit authorization of accumulation of the effects of subsidized imports from more than one Member where specified criteria are fulfilled. In addition, Part V contains rules regarding the determination of the existence and amount of a benefit. Procedural rules Part V of the SCM Agreement contains detailed rules regarding the initiation and conduct of countervailing investigations, the imposition of preliminary and final measures, the use of undertakings, and the duration of measures. A key objective of these rules is to ensure that investigations are conducted in a transparent manner, that all interested parties have a full opportunity to defend their interests, and that investigating authorities adequately explain the bases for their determinations. A few of the more important innovations in the WTO SCM Agreement are identified below: •
Standing. The Agreement defines in numeric terms the circumstances under which there is sufficient support from a domestic industry to justify initiation of an investigation.
Preliminary investigation. The Agreement ensures the conduct of a preliminary investigation before a preliminary measure can be imposed.
Undertakings. The Agreement places limitations on the use of undertakings to settle CVD investigations, in order to avoid Voluntary Restraint Agreements or similar measures masquerading as undertakings
Sunset. The Agreement requires that a countervailing measure be terminated after five years unless it is determined that continuation of the measure is necessary to avoid the continuation or recurrence of subsidization and injury.
Judicial review. The Agreement requires that Members create an independent tribunal to review the consistency of determinations of the investigating authority with domestic law.
Transition Rules and Special and Differential Treatment
Developed countries Members not otherwise eligible for special and differential treatment are allowed three years from the date on which for them the SCM Agreement enters into force to phase out prohibited subsidies. Such subsidies must be notified within 90 days of the entry into force of the WTO Agreement for the notifying Member. Developing countries The SCM Agreement recognizes three categories of developing country Members: leastdeveloped Members (â€œLDCsâ€?), Members with a GNP per capita of less than $1000 per year which are listed in Annex VII to the SCM Agreement, and other developing countries. The lower a Member's level of development, the more favorable the treatment it receives with respect to subsidies disciplines. Thus, for example, LDCs and Members with a GNP per capita of less than $1000 per year listed in Annex VII are exempted from the prohibition on export subsidies. Other developing country Members have an eight-year period to phase out their export subsidies (they cannot increase the level of their export subsidies during this period). With respect to importsubstitution subsidies, LDCs have eight years and other developing country Members five years, to phase out such subsidies. There is also more favorable treatment with respect to actionable subsidies. For example, certain subsidies related to developing country Members' privatization programs are not actionable multilaterally. With respect to countervailing measures, developing country Members' exporters are entitled to more favorable treatment with respect to the termination of investigations where the level of subsidization or volume of imports is small. Members in transformation to a market economy Members in transformation to a market economy are given a seven-year period to phase out prohibited subsidies. These subsidies must, however, have been notified within two years of the date of entry into force of the WTO Agreement (i.e., by 31 December 1996) in order to benefit from the special treatment. Members in transformation also receive preferential treatment with respect to actionable subsidies. Notifications Subsidies Article 25 of the SCM Agreement requires that Members notify all specific subsidies (at all levels of government and covering all goods sectors, including agriculture) to the SCM Committee. New and full notifications are due every three years with update notifications in intervening years. The notifications are the subject of extensive review and discussion by the SCM Committee. Countervailing legislation and measures All Members are required to notify their countervailing duty laws and regulations to the SCM Committee pursuant to Article 32.6 of the SCM Agreement. Members are also required to notify all countervailing actions taken on a semi-annual basis, and preliminary and final countervailing actions at the time they are taken. Members also are required to notify which of their authorities are competent to initiate and conduct countervailing investigations. Dispute Settlement The SCM Agreement generally relies on the dispute settlement rules of the DSU. However the Agreement contains extensive special or additional dispute settlement rules and procedures providing, inter alia, for expedited procedures, particularly in the case of prohibited subsidy allegations. It also provides special mechanisms for the gathering of information necessary to assess the existence of serious prejudice in actionable subsidy cases.
2.2.2 Implications of the Agreement disciplines for export finance systems: credits, guarantees and insurance The implications of the SCM Agreement disciplines for export credits, guarantees and insurance, in particular to developing countries, are complex. The WTO Secretariat does not have any interpretative power in this domain, as the interpretation and implementation of the Agreement is left to Members, and certain legal issues regarding the scope of the disciplines are unresolved. That said, certain observations can be made regarding the Agreement on Subsidies and Countervailing Measures: The SCM Agreement prohibits subsidies that are contingent upon export performance, and export credits, guarantees and insurance may under certain circumstances fall within the scope of that prohibition. •
Under Article 1 of the SCM Agreement, a subsidy is defined as (a) a financial contribution (b) by a government of public body within the territory of a Member (c) which confers a benefit. Export credit, guarantee and insurance schemes involve “financial contributions”, and central banks, Export Credit Agencies and other government-owned or controlled entities that provide such schemes likely constitute “governments” or “public bodies”.
While the existence of “benefit” will depend upon the terms and conditions of the financial contribution provided, export credit, guarantee and insurance schemes likely confer a “benefit” in cases where they place the recipient in a more favorable situation than it would be if it needed to rely on the marketplace.
As for export contingency, this will almost always be satisfied in the case of export credits, guarantees and insurance. Article 3 of the SCM Agreement, however, refers to Annex I of the SCM Agreement, the Illustrative List of Export Subsidies.
Relevant for trade finance are sections (j) and (k), first paragraph, pertaining to export credit guarantee and insurance schemes, and to export credit schemes, respectively. In general terms, item (j) provides that export credit guarantee and insurance schemes are prohibited export subsidies where premiums are inadequate to cover long-term operating costs and losses, while item (k) first paragraph provides that export credits are prohibited export subsidies where, inter alia, they are provided at less than the government’s cost of borrowing. It is not clear whether items (j) and (k) first paragraph can be used to establish that a scheme, which does not satisfy the conditions therein, is not prohibited, even in cases where there is a prohibited export subsidy within the meaning of Articles 1 and 3. “(j) The provision by governments (or special institutions controlled by governments) of export credit guarantee or insurance programs, of insurance or guarantee programs against increases in the cost of exported products or of exchange risk programs, at premium rates which are inadequate to cover the long-term operating costs and losses of the programs. (k) The grant by governments (or special institutions controlled by and/or acting under the authority of governments) of export credits at rates below those which they actually have to pay for the funds so employed (or would have to pay if they borrowed on international capital markets in order to obtain funds of the same maturity and other credit terms and denominated in the same currency as the export credit), or the payment by them of all or part of the costs incurred by exporters or financial institutions in obtaining credits, in so far as they are used to secure a material advantage in the field of export credit terms.
Provided, however, that if a Member is a party to an international undertaking on official export credits to which at least twelve original Members to this Agreement are parties as of 1 January 1979 (or a successor undertaking which has been adopted by those original Members), or if in practice a Member applies the interest rates provisions of the relevant undertaking, an export credit practice which is in conformity with those provisions shall not be considered an export subsidy prohibited by this Agreement.” Source: Annex I of Agreement www. http://www.wto.org/english/docs_e/legal_e/24-scm_03_e.htm
Under item (k) second paragraph of Annex I, export credit practices that are in conformity with the interest rate provisions of the OECD Arrangement on Officially Supported Export Credits are not prohibited. This is the case whether or not the WTO Member is a participant to the Arrangement, so developing country Members not participants to the Arrangement may also invoke the safe haven. The OECD Arrangement applies only to medium and long-term credit (2 years or more), whereas the main bulk of trade finance is related to short-term financing. Least-developed country Members are exempted from the prohibition on export subsidies, as are certain other developing country Members listed in Annex VII to the Agreement until their GNP per capita reaches US$ 1000 (in 1990 constant dollars) for three consecutive years. Although the SCM Agreement is not clear in all respects, certain points can be made regarding ways to reduce the risk of a non adequate export finance system. •
The Agreement prohibits only two types of subsidies: that contingent upon exportation and that contingent upon the use of domestic over imported goods. Thus, schemes that deal only with the financing of essential imported inputs, are available irrespective of whether the imported inputs are for use for the production of goods for export or for domestic consumption, and do not discriminate with respect to the origin of the inputs, are not likely to run afoul of the prohibitions found in the SCM Agreement.
Second, some Members seem to be of the view that multilateral development assistance is not within the scope of Article 1 of the SCM Agreement. Thus, schemes that are funded entirely by multilateral institutions are less likely to give rise to dispute settlement challenges in the WTO.
Finally, and as noted above, a significant number of less-advanced developing country Members are not currently subject to the WTO prohibition on export subsidies. For these Members, there is substantially greater flexibility to address the problems identified in this report, even through measures that are oriented towards problems of trade financing faced by exporters.
As conclusion, there is a fundamental rule within the World Trade Organization on subsidies and balancing measures: the activities of an export credit agency must break even in the long term. The premiums each agency charges must be sufficient to cover its long-term costs and losses.
Overview of Export Financing Models in Spain, Hungary and Slovakia: Institutional Arrangements, Regulations, and Impact.
3.1. Introduction The British Exporters Association BExA benchmarking report which had been conducted in 2011 offers a summary of ECAs’ range of products and services and ECAs’ business volumes: ECA Range of Services – Summary of results of top 10 exporting countries´ ECAs
UK Canada China France Germany Italy Japan Netherlands South Korea USA Total
Working capital facility
Foreign exchange fluctuation
Bound support scheme/ issuance
Fixed rate Financing (CIRR)
9 9 9 9 9 9 9 9 9 9
9 9 9 9 8 9 9 8 9 9
8 9 8 9 8 8 8 9 9 8
9 9 9 9 9 9 9 9 9 8
8 9 8 9 9 9 9 8 9 9
8 9 9 8 9 8 9 8 9 9
3 6 4 5 4 4 5 3 6 4
Source: British Exporters Association, 2011
ECAÂ´s range of products and services
9 9 9
9 9 9
9 9 9
9 8 8
8 9 9
8 8 9
9 8 9 9 20
8 8 8 9 30
9 9 9 8 30
9 9 9 9 27
9 9 8 9 25
9 9 8 9 24
8 7 5 8
9 9 8 9 24
8 8 8 8 12
9 9 9
9 9 9
EKN/SEK/ALMI SERV Eximbank ExIm/OPIC Total
Yes Yes Yes Yes
9 9 9 9 35
9 9 9 9 36
Sweden Switzerland Turkey USA
9 8 9
9 9 9
9 8 9 5 7 6 7 6 8 7 6 8
No No Yes
Slovenia South Africa South Korea
9 9 9 8 9 9 8 9 8 8 8 9
8 9 9
Eximbanka SR SID Bank ECIC SA KEIC/KEXIM
ECGC/Eximbank SACE/SIMEST NEXI/JBIC ODD Eximbank Bancomext Atradius NZECO GIEK/Ekportfinans KUKE COSEC EximBank
9 9 9 8 9 n.a. 9 9 9 9 8 9
9 9 9 9 9 n.a. 9 8 9 9 9 9
9 9 9 9 8 n.a. 8 8 9 9 8 9
India Italy Japan Luxembourg Malaysia Mexico Netherlands New Zealand Norway Poland Portugal Romania
9 8 9 8 8 9 8 8 9 8 8 8
9 9 9 9 9 9 9 9 9 9 9 9
9 9 9 9 9 9 9 9 9 9 9 9
Yes Yes Yes Yes No No Yes No No Yes Yes Yes Yes Yes Yes
n.a. 9 9 9 9 n.a. 9 9 9 n.a. 9 n.a.
8 9 8 8 8 8 9 9 8 8 9 9 9
No Yes Yes Yes No Yes Yes Yes Yes Yes Yes No
ECGD EFIC OeKB ONDD SBCE BAEZ EDC Sinosure/Eximbank HBOR EGAP/CEB EKF Finnvera/FEC Coface Euler Hermes/KfW ECIO
9 9 9 8 9 9 9 9 9 9 9 9
9 9 9 9 n.a. 9 9 9 9 9 9 9 9 9 9
UK Australia Austria Belgium Brazil Bulgaria Canada China Croatia Czech Republic Denmark Finland France Germany Greece
Source: British Exporters Association, 2011
Foreign Exchange fluctuation cover 8 9 8 8 n.a. n.a. 9 8 8 8 8 8 9 8 9
8 9 8 8 9 8 9 9 9 9 9 9 8 9 8
Bond support scheme / issuance 9 9 n.a. 9 8 n.a. 9 9 9 9 8 9 9 9 9
9 8 9 9 9 9 9 9 9 9 9 9 9 9 9
9 9 n.a. 9 n.a. 9 9 8 n.a. 9 9 9 9 9 n.a.
Fixed rate financing (CIRR) 8 9 9 9 n.a. n.a. 9 8 9 9 8 9 9 9 n.a.
Letter of credit guarantee scheme 9 9 n.a. 8 n.a. 9 9 8 9 9 9 9 9 9 n.a.
Medium/ Long-term export credit schemes 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9
ECAs/Other government agencies
Unfair calling insurance
Working capital facility
9 9 8 9 n.a. 9 9 9 9 9 9 9 9 8 n.a.
7 9 4 7 3 6 10 7 8 9 7 9 9 8 5
ECAsÂ´business volumes Country
Export Credit Agency
1,995.0 116.3 5,505.0 12,317.0 304.5 57,544.0 21,213.0 1,445.0
2,230.0 269.7 8,714.0 14,671.0 234.8 66,091.0 33,807.0 2,216.0
1,789.0 554.4 12,316.0 19,866.0 292.9 70,022.0 43,409.0 2,312.0
1,830.0 369.2 12,063.0 28,163.0 319.2 85,819.0 67,679.0 1,701.0
1,460.0 576.5 5,160.0 19,235.0 354.4 82,769.0 119,853.0 2,500.0
2,206.0 971.3 3,869.0 22,575.0 443.2 84,616.0 201,930.0 2,140.0
m m m m m m m m
GBP AUD EUR EUR BGN CAD USD HRK
Overall Business volume trend -48.36% +161.81% +1.74% +238,00% +234.03% +90.80% +5,888.43% +1.66%
UK Australia Austria Belgium Bulgaria Canada China Croatia Czech Republic Denmark Finland France Germany
ECGD EFIC OeKB ONDD BAEZ EDC Sinosure/Eximbank HBOR EGAP
5,662.0 371.0 3,803.0 6,679.0 n.a. 44,347.0 n.a. 2,105.0
3,298.0 448.8 3,564.0 7,573.0 n.a. 51,240.0 3,372.0 1,001.0
3,532.0 473.4 4,235.0 7,372.0 n.a. 51,860.0 6,364.0 1,551.0
2,991.0 95.5 5,191.0 8,922.0 129.2 54,903.0 15,098.0 1,308.0
EKF Finnvera Coface Euler Hermes
n.a. n.a. n.a. 16,563.0
4,855.0 837.4 n.a. 16,434.0
6,945.0 1,345.6 5,600.0 15,989.0
9,600.0 1,111.3 6,900.0 21,067.0
12,700.0 2,645.5 8,800.0 19,773.0
12,550.0 1,297.9 7,400.0 20,552.0
8,970.0 964.0 8,800.0 16,970.0
10,192.0 3,844.9 7,400 20,683.0
13,700.0 3,759.8 20,100.0 22,379.6
9,00.0 2,642.4 14,900.0 32,462.5
m m m m
DKK EUR EUR EUR
+85.38% +215.55% +166.07% +96.75%
India Italy Japan Luxembourg Malaysia Mexico Netherlands Norway Poland Portugal
ECGC/Eximbank SACE NEXI/JBIC ODD Eximbank Bancomext Atradius DSB GIEK KUKE COSEC
5,863.1 2,610.0 12,085.2 n.a. n.a. n.a. n.a. 2,680.0 n.a. n.a.
6,144.5 3,080.0 12,565.0 n.a. 884.0 n.a. n.a. 3,562.0 n.a. n.a.
7,632.3 3,628.0 13,030.9 n.a. 1,077.0 n.a. n.a. 3,238.0 737.6 n.a.
8,346.2 5,258.0 12,679.1 505.0 1,478.0 n.a. n.a. 3,521.0 1,366.6 n.a.
11,530.8 7,668.0 14,187.2 640.0 1,577.0 n.a. 2,300.0 2,980.0 1,295.9 32.7
13,505.2 8,233.0 16,532.2 725.0 1,759.0 n.a. 2,400.0 4,889.0 1,460.4 103.3
17,833.1 10,084.0 11,213.1 1,050.0 2,699.0 2,844.0 4,100.0 11,400.0 1,476.8 134.0
19,046.1 8,300.0 12,420.8 1,405.6 2,493.0 4,312.0 3,000.0 15,222.0 1,787.5 157.1
22,592.5 11,100.0 11,564.1 894.6 1,788.0 3,000.0 2,400.0 16,640.0 670.3 170.3
27,308.1 10,400.0 n.a. 868.4 n.a. 3,037.0 1,800.0 24,205.0 n.a. 269.4
m m bn m m m m m m m
USD EUR JPY EUR MYR USD EUR NOK USD EUR
+365.76% +298.47% -4.31% +71.96% +102.26% +6.79% -21.74% +803.17% -9.12% +723.85%
Slovenia South Korea
SID Bank KEIC
Sweden EKN Switzerland SERV Turkey Eximbank USA ExIm * UK, ECGD 2011: 2.294,0. Source:
26,778.0 2,102.0 2,929.0 9,241.5
22,795.0 1,952.0 2,833.6 10,119.2
16,686.0 2,201.0 3,122.0 10,507.2
20,450.0 2,338.0 3,594.2 13,321.0
27,204.0 1,513.0 4,181.0 13,936.2
39,555.0 2,527.0 4,274.5 12,150.5
23,943.0 3,537.0 4,707.3 12,569.4
32,905.0 2,904.0 5,083.7 14,398.9
80,169.0 3,529.0 4,673.7 21,021.1
113,730.0 3,588.0 5,088.7 24,467.8
m m m m
SEK CHF USD USD
+324.71% +70.69% +73.74% +164.76%
British Exporters Association, 2011
3.2. The case of Spain Spain, the twelfth world economy, has the same population as Ukraine, with over 3,2 million enterprises in 2011, of which 91% are micro enterprises, 8,9% are SMEs and only 0,1%, that is, only 3200 companies have more than 250 employees. Given this corporate structure, the institutions involved in trade finance are several. The most important are CESCE and ICO, Cesce involved in trade insurance and reinsurance and ICO in trade financing, internationalization of SMEs and investment financing on behalf of the Spanish State. ION 5
CESCE, CESCE Credit Insurance Corporation and Group
CESCE was founded in 1970 to primarily operate in the field of export credit insurance
for the account of the State, as an instrument to foster Spanish exports. After deregulation in 1990, CESCE started to actively compete for its own account on the open export credit and domestic credit insurance markets.
CESCE operates in eleven countries in Europe and Latin America, where it is the market leader in credit insurance. (CESCE Internacional).
It has a commercial network structured in 6 regional offices and 25 branches nationwide, at this manner CESCE is very close to the SMEs, 99,9 % of Spanish companies.
A network of more than 300 agents with expertise in the management of commercial risks and prevention of payment defaults.
CESCE Group is made up of some CESCE S.A. subsidiaries and specializes in the comprehensive management of commercial risk.
The Group integrates, apart from the parent company, INFORMA D&B, S.A. (the financial and commercial information provider), CESCE Internacional and CTI, S.A. (the provider of IT services).
CESCE, S.A., as the State Agency for promoting exportation.
CESCE, S.A. also acts for the account of the Spanish State in the cover of the long-term political, extraordinary and commercial risks of Spanish exports (as well as political risks of foreign investments) which are not handled by private insurance. Basic Data
Ownership: CESCE is a limited company in British English, Corporation in the EU. 50,25% of its shares are held by the Spanish State, while the remainder is in the hands of Spain’s
insurance companies (3,9 %), and main banking groups among which the Banco Santander (21,07%), BBVA (16,3%), other Banks (Banco Sabadell and Banco Popular, 8,48%).
In 2010 Standard & Poor’s confirmed the rating of the Company as A-, improving its outlook from “stable” to “positive”.
Structure of Group:
Source: CESCE, Credit Insurance Corporation
The actual product distribution model has been designed to facilitate personal contact with CESCE’s clients and to guarantee high quality customer relations and service through a network of branches, regional offices and agents all over the country as well as on the French and Portuguese markets through the regional offices in Paris and Oporto. CESCE also distributes its products through an extensive network of insurance brokers. In 2010 CESCE consolidated a sophisticated and innovative business model based on a variable price system, which was started to implement in 2008. It is a model that enables CESCE to monitor risks more satisfactorily and to prevent payment defaults in a more effective manner, offering global solutions to meet the needs of the clients at the different stages of maturity and experience of their commercial activity. CESCE does not classify its clients in small and medium sized companies with exception of Policy 100 for new exporters, taking into consideration the clear regulatory environment.
Specifically, to prevent payment defaults it has become essential to adopt a different approach in the way companies behave when they insure their sales and in the analysis of the policyholders debtors’ portfolio. CESCE is an expert in Comprehensive Commercial Risk Management and, as such, it provided their clients with support at all stages of their commercial transactions. They have not merely confined themselves to a traditional policy; rather they offer a comprehensive range of services, with the CESCE Master GOLD solution as its main exponent, which includes market prospection tools, portfolio analysis, and assistance with financing, besides indemnification in the event of non-payment. Values of CESCE
Internal Management Systems: Quality and the Environment CESCE possesses a certified Quality System (ISO 9.001), which covers practically all its activities and CESCE S.A. monitors direct impacts stemming from its business activiy by means of monitors direct impacts stemming from its business activity by means of an Environmental Management System certified in accordance with ISO Standard 14.001. The Environmental Management System is integrated into the Quality System (ISO 9.001), which the Company has had certified since 1999.
Transparency The business activity of export credit insurance for the account of the State is subject to the terms laid down in the rules of the OECD Consensus, the Community regulation in the field of officially supported export credit insurance, and the special domestic legislation in this area. This specific activity is controlled externally by various General State Administration bodies, including the Court of Auditors and published in the Annual Report containing a detailed description regarding its business activity for the account of the State.
Sustainable financing The insurance of Spanish officially supported export financing responds to the interests of the Spanish economy, while at the same time it enables projects to be carried out that promote the economic development of the emerging countries. This financing, however, generates in turn the corresponding indebtedness of the developing countries. In order to prevent excessive indebtedness in some countries from impairing their development, CESCE, S.A. applies the OECD sustainable financing recommendations (LI countries) and the rules contained in the Law governing external debt management for highly indebted poor countries (HIPC).
Anti-corruption policy CESCE is committed to the fight against corruption in international economic transactions. The Company has an Anti-corruption Policy in line with Anti-Corruption Convention, signed by the OECD countries. Policyholders have to submit a Declaration Form stating their compliance with the OECD Convention and the domestic law regulations issued for its application. The Company also has internal operating procedures in case the participants in a transaction have a prior record of, or engage in criminal conduct in relation to corruption.
CESCE always assesses the possible environmental impact of all the projects that it insures for the account of the State and checks that they come up to international environmental standards prior to making any decision on cover, in compliance with the OECD Agreement in the environment area, known as “Common Approaches”. CESCE goes beyond its scope by extending its application to other officially backed policy modalities not regulated by the OECD. The Company is equipped with its own absolutely innovative software system for environmental filtering, called Ecocheck, and facilitates public access to environmental information on Category A projects (significant environmental risk) during the insurance processing stage. In addition, CESCE publishes a quarterly list of policies issued in respect of operations classified as category A and B for an amount exceeding EUR10 million, as well as an annual statistical report summarizing the results of the environmental assessment of the operations handled during the year. Major Facilities
Export Credit Insurance: Commercial and political cover for export markets; pre and postshipment risks for both short-term and medium/long-term transactions.
Investment Insurance: Conversion/transfer, war and civil war, breach of undertakings by host government, expropriation/ confiscation. Bonds and guarantees: unfair calling, fair calling of bonds, cover to banks, bonds/guarantees issued.
General Major Facilities: Products. All the products of CESCE are designed for SMEs and Large Companies, with exception of 100 Policy. A.
B.1. Operations with a term of payment of less than two years B.1.1. Master Policy CESCE's Master Policy is a customized product designed to meet the requirements of Spanish companies maintaining a regular sales flow to customers on the domestic and foreign markets. With this policy CESCE's client will be covered against the risk of default inherent in all credit sales to any of its clients, customers. It's a flexible product, adjustable to the needs of a company and take-out is not based on a minimum figure. Its many strengths dynamize and facilitate the business' management of the company. Risks Covered: -
Political and Extraordinary.
B.1.2. 100 Policy An easy and simple product for Spanish exporters who maintain a regular flow of sales abroad, or are considering starting this activity, in both cases by an annual volume not exceeding 1.200.000 euros. Objectives This Insurance Policy aims to facilitate the startup, manteinance and growth of the SME´s export activity. Compared to other policies, Policy 100 has specific characteristics, among which it is worth highlighting its administrative simplicity. By hiring this Policy, the company is covered against the risk of default payment inherent in all exports, of any of its customers. This product allows covering all exports of goods or services to be paid on credit, maturing in less than two years. Risks covered •
Political and Extraordinary
Online Services: Cesnet To facilitate the management of this Policy, Cesce offers a technology platform, CESNET, which is accessible through Cesce´s website with the keys that the exporter will be provided with the contract, through which the exporter will entirely manage its policy. Among other options the exporter will be able to apply for and obtain the credit ratings from his customers, communicate any extension or default of payment and check on-line check the status of them Although this Policy was a complete success in the decade of 2000, nowadays it has fallen into disuse, being replaced by the Master Policy. B.1.3. Individual Supplier Credit Policy Designed to insure one-off exports with a payment term of less than two years. It offers cover both for the risk of non-payment of the loan by the debtor and the one-sided termination of the contract by the importer either without justification or due to political reasons. Risks covered -
Political and Extraordinary
B.1.4. Individual Documentary Credit Policy With this Policy CESCE insures the financial institutions, operation by operation, against the risks inherent in the confirmation of a documentary credit issued by a foreign entity. Therefore, in this modality the insured is the Bank which confers confirmation on a Letter of Credit. The purpose of the credit should be the instrumentation of the payment for a Spanish export operation. The cover is provided in the currency of the documentary credit.
Risks covered: As a rule, cover extends over political and extraordinary risks. In the event of the debtor (issuer of the documentary credit) having public entity status, the risk of non-payment by the debtor is added to the previous covers. B.1.5. Open Documentary Credit Policy This Policy insures the Financial Institutions globally against the risks inherent in the confirmation of all the documentary credits issued by the foreign institutions included in the Policy. The maximum amount covered is the Open Policy and the insured may apply it at any time to any of the issuers included in the Policy. Risks Covered: As a rule, cover extends over political and extraordinary risks. In the event of the debtor (issuer of the documentary credit) having public entity status, the risk of non-payment by the debtor is added to the previous covers. The cover is provided in euros and the insured may choose between two policy modalities. -
Modality A: with the exchange rate on the day of payment to the Beneficiary
Modality B: with the exchange rate on the fifth day after the date of reimbursement.
Operations with a term of payment of two years or more:
B.2.1. Buyer Credit Policy This policy assures the financial institution of the reimbursement of the credit granted to the foreign buyer for the purchase of Spanish goods and services in the event of non-repayment of this loan. Risks covered and maximum percentages of cover -
Political and Extraordinary: 99%
B.2.2. Individual Supplier Credit Policy Designed to insure one-off exports with a payment term of more than two years. It offers cover both for the risk of non-payment of the loan by the debtor and the one-sided termination of the contract by the importer either without justification or due to political reasons. Risks covered -
Political and Extraordinary 99%.
B.2.3. Works and Jobs Abroad Insurance Policy This policy is designed for companies that carry out operations consisting of the provision of services (construction works or jobs, installations, etc.) abroad. CESCE insures the risks during the building or job execution stage. This product covers Spanish contractors against the final net loss that they may incur as a result of: -
Construction risk, which includes: contract termination, refusal to certify, non-payment of progress certificates, failure to pay back the loan (deferred payment).
Risk of confiscation or non-repatriation of the stock of machinery.
Risk of failure to transfer the working capital to Spain.
Risks covered -
Political and Extraordinary 99%.
B.2.4. Surety bonds execution policy for guarantors This Policy is intended for those operations in which the Exporter is required to supply a surety bond, stemming from an export contract, to the foreign buyer or authorities of the country, and covers the Institution which issues the bond on the Exporter's behalf for the risk of bond execution. When the bond is executed on the Spanish financial institution issuing said instrument, which has been provided on behalf of the Spanish exporter, a credit originates between the exporter and the financial institution. The policy covers the risk of non-payment of this credit. B.2.5. Surety bonds execution policy for exporters This Policy is intended for those operations in which the Exporter is required to supply a surety bond, stemming from an export contract, to the foreign buyer or authorities of the destination country. The Policy covers the Exporter for the risks of undue bond execution by the foreign contracting party. Risks covered and maximum cover: 99%. B.2.6. Bank Guarantee Policy This policy is designed for transactions in which a Financial Institution grants the Exporter a prefinancing loan for the payment of salaries, raw materials, etc. during the manufacturing stage, or for the bank discount of the effects in foreign currency. CESCE covers the Financial Institution against the final net loss that may incur as a result of failure to make full or partial repayment of the prefinancing or financing loan by the exporter. Risks covered and maximum percentages of cover: Commercial: 99%. B.2.7. Compensation Transaction Insurance Policy This policy is designed so that the Exporter may insure against the risks of failure to deliver the goods in compensation transactions. CESCE indemnifies the insured exporter against the losses that he may incur due to failure to deliver the compensation goods for political reasons. Risks covered and cover percentages: -
B.2.8. Project-Finance Transaction Insurance CESCE grants cover against Political and Commercial Risks for transactions financed with the sole guarantee of the resources that the actual project may be in a position to generate. Risks covered and cover percentages -
Political: Depending on the project.
Commercial: Depending on the project.
B.2.9. Foreign Investment Insurance Policy Promote the internationalization of Spanish companies by offering them a flexible instrument which will enable them to cover the possible losses that they could incur in their foreign investment stemming from the occurrence of political risks which, although lying beyond the control of the investor or his subsidiary, could have a considerable impact on the result of his foreign investment. CESCE can cover the losses stemming from the following political risk situations: (1) expropriation, nationalization, confiscation of the foreign company, although this cover may extend to the possible changes in the country's legal and economic framework which could give direct rise to the inviability of the foreign company ("regulatory risk") (2) non-transfer of amounts relating to the investment, dividends, repayment of long-term loans (3) political violence, including terrorism and other serious alterations of public order and (4) breach of agreements or non-fulfillment of commitments by the authorities of the recipient country in respect of the investment insured, and revolution or war - which may affect the foreign investment operations of Spanish with a long-term stability taking the form of the establishment of companies, participation in capital increases, assets endowments, re-investments of returns, sale of holdings, etc. Besides the asset losses resulting from the occurrence of the afore-mentioned risks, the insurance may also cover the loss of profits over a period of up to one year that may be incurred by the investor due to the shut-down of a subsidiary's activities because of war or political violence. Risks covered and maximum cover percentages: Only those risks of a political nature are covered that may affect the commitments acquired with the investment on the part of the recipient state, its official bodies or administrative subdivisions, or public companies. -
Maximum cover percentage: 99%.
Master Policy (Spain)
CESCE's Master Policy is a customized product designed to meet the requirements of Spanish companies maintaining a regular sales flow to customers on the domestic and foreign markets. With this policy the company will be covered against the risk of default inherent in all credit sales to any of its clients. It's a flexible product, adjustable to the needs and take-out is not based on a minimum figure. It's many strengths dynamise and facilitates the businessâ€™ management. Risks Covered -
Political and Extraordinary
Global Market Credit Policy (Spain)
Global Market Credit Insurance (Portugal)
This product is designed for Portuguese companies maintaining a regular flow of sales to various companies on both foreign and domestic markets. Purpose: The insured is compensated for all losses he may suffer as a result of the total or partial non-payment of insured domestic and/or foreign credit transactions due and payable within up to 360 days. Risks covered: -
Global Market Credit Insurance (France)
This product is designed for French companies maintaining a regular flow of sales to various companies on both foreign and domestic markets. Purpose: The insured is compensated for all losses he may suffer as a result of the total or partial non-payment of insured domestic and/or foreign credit transactions due and payable within maximum 360 days. Risks covered: -
For a Financial Institution carrying out factoring, forfaiting or confirming operations, CESCE is able to offer specific products to cover these transactions. On-line consultancy is possible. D.1.
Open Factoring / Forfaiting Insurance Policy
The insured (financial institution) is compensated for losses it may suffer as a result of the total or partial non-payment of receivables that, generated by the firm sale of goods and/or services, were acquired without recourse from the assignors (suppliers). Types: 1) Home – Domestic
Assignor: Spanish; Debtor: Spanish
2) Home – Import
Assignor: Foreign; Debtor: Spanish
3) Foreign – Export
Assignor: Spanish; Debtor: Foreign
Risks covered: •
Commercial, Political and Extraordinary.
Open Confirming Insurance Policy
The insured (financial institution) is compensated for losses it may suffer as a result of the total or partial non-payment of credits acquired without recourse under the Supplier Receivables Management Contract entered with the debtor. Types: •
Risks Covered: •
Results of Business performance 2010 The main highlight has been a very large reduction of payment defaults that allowed CESCE to reach a minimum historical rate on behalf of their clients, as in February 2009 this rate had scaled up to 190%. Thanks to the measures that have been taken to avoid payment defaults and to the execution of the new business model, the claims rate fell from 138% in 2008, to 76% in 2009, and to a record 32% in 2010, the Company’s historic minimum. In addition, compared with the 52.6 million EUR loss in 2008, in 2009 CESCE obtained profits of 18.14 million EUR, which further rose to 83 million EUR in 2010, the highest profit in the history of CESCE. As equity CESCE achieved the figure of 232,385 thousand Euros. Everything has been compatible with an increase in its market share, which is now over 28% compared with an 18% of four years ago.
In 2010 CESCE reported revenues above 256 million EUR and reached over 36 billon euros in transaction insured against payment defaults, 61% in the domestic market and 39% in the foreign market.
7 Billion EUR in transactions insured on behalf of the Spanish State.
CESCE monitors and advices its clients on 700,000 buyers with current risks.
ICO, Instituto de Crédito Oficial Corporate Description
Instituto de Crédito Oficial (ICO) is a corporate state-owned entity attached to the Ministry of Economic Affairs and Competitiveness through the Secretariat of State for Economic Affairs. It has the legal status of a credit institution and is defined as the State's Financial Agency. It has been entered in the Special Administrative Register of the Bank of Spain as Stateowned investment bank and the State’s Financial Agency.
With its 40-year history, ICO has become a benchmark credit institution in the financing of both SME and large-scale infrastructure projects, not only in Spain but also abroad. The institute's purpose is to boost any economic activity which, on account of its social, cultural, innovative or ecological significance, merits promotion and development.
Founded: 1971 (19th June).
Ownership: 100% State.
Legal Framework: o
The Institute was created by Law 13/1971 of 19 June. Currently, the Institute is governed by the following rules:
Royal Decree 390/2011 of 18 March
Sixth Additional Provision of Royal Decree-Law 12/1995 of 28 December on urgent budgetary measures, tax and financial.
Royal Decree 706/1999 of 30 April, to adapt the Official Credit Institute to Law 6/1997 of 14 April, organization and functioning of the State General Administration and approval of its Statutes.
To carry out all its activities, the Institute is financed by obtaining resources in the financial markets.
The Institute has the sovereign guarantee of the Spanish Government for the payment of the debts and other obligations contracted by raising funds in the markets. A guarantee which is explicit, irrevocable, unconditional and direct, and therefore the rating held by the ICO is the same as the one of the Kingdom of Spain; the ratings for long-term issues are detailed in the following table:
Standard & Poor’s
78% of ICO's external resources come from the issuance of bonds (medium and long term), which enjoy the following features:
The ICO debt is entitled the same treatment as public debt when the fund rising is done abroad: not subject to withholding tax.
Risk weight: 0%.
That is, ICO debt is an alternative to debt issues of the Kingdom of Spain.
Structure of Group: o
The Governing Council: The Institute's highest governing and administrative body.
The Operations Committee: Responsible for the day-to-day management of the Institute, the committee submits to the Governing Council all operations which, by virtue of their nature, fall within its scope.
Source: Instituto de Crédito Oficial, ICO.
Loans for the Self-Employed and SMEs
In 2010, the Institute granted loans to SMEs and the self-employed by means of two instruments: the usual second-floor system, in which loans are distributed by cooperating banks and savings banks; and the start-up in June of ICOdirecto, consisting in loans analyzed and granted directly by ICO for smaller productive units (information about the products supplied and their specific characteristics is available on the Institute’s commercial website, http://www.icodirecto.es.
In 2010, total resources allocated by ICO to loans for the self-employed and SME amounted to EUR 19,797 billion or 30.6% more than in 2009, http://www.facilitadorfinanciero.es.
For the purpose of improving efficiency in the allocation of the resources supplied by ICO to the productive network, in 2010, the catalogue of second-floor loans was reorganized so as to simplify the various facilities and provide the end-customer with a better service.
As far as the performance of second-floor loans in 2010 is concerned, it is also worth mentioning the considerable growth of the two above-mentioned main facilities: drawdowns of loans under the ICO-Liquidity Facility were 62% higher than one year previous while drawdowns under the ICO-Investment Facility increased by 31.5%.
Through its second-floor facilities, in 2010, ICO attended to 300,000 loan applications from SME and the self-employed, to which must be added operations granted under ICO directo (3,647 operations from June onwards).
As a result of ICO’s anti-cyclical response and the effort to come into closer contact with its target public, over 35% of the SME applying for a loan in 2010 filed their applications with ICO, according to the quarterly survey released by the Higher Board of Chambers of Commerce. SME Loan Applications (number of enterprises which applied for external financing and the percentage which applied to ICO)
Source: Instituto de Crédito Oficial, ICO.
Capital Funds for SMEs As part of its anti-cyclical strategy to address current economic circumstances and provide support for the Government’s economic policy, in 2010, ICO promoted the various capital funds which it manages either directly or through its 100% investor company, AXIS, Participaciones Empresariales, S.G.E.C.R., S.A.U. FESpyme (SME) AXIS was assigned the management of one of the venture capital products belonging to the fund known as FESpyme, born of the Sustainable Economy Act set under way by the Government in December 2009. The allocation of the fund it had been managing until that time, FOND-ICO, F.C.R., was increased from EUR 122 million to EUR 422 million and the fund was renamed FESpyme, FCR. As a venture capital firm, FESpyme offers two possible financing formulas for Spanish enterprises to choose from: on the one hand, venture capital proper, understood as the fund’s minority holding in the capital for a limited period; and, on the other, the participating loan. FESInfraestructuras
Within the same framework as the Sustainable Economy Fund, a second venture capital fund has been set up: FESInfraestructuras, F.C.R., likewise managed by AXIS. With an initial allocation of EUR 500 million (there are plans to extend it to EUR 1.000 million), its aim is to participate in infrastructure projects, above all in the transport, energy, environment, social infrastructure and services sectors. This fund is directed at projects in Spain concerning newbuild infrastructures. In the main, FESinfraestructuras finances enterprises through holdings in capital, subordinated debt and participating loans. As regards tenders, the fund will take up its holding once the project has been awarded (generally on a concessionary basis) and may, as applicable, issue prior generic eligibility letters to bidders on their request. Pyme Expansión (SME Expansion) Similarly, through FESpyme, ICO has invested in the fund known as Pyme Expansión. With equity of EUR 15 million, the fund is held by Empresa Nacional de Innovación (ENISA), SEPIDES and FESpyme with equal shares. It is managed by SEPIDES Gestión. The fund will foster the promotion and development of corporate activities, focusing its investments on companies with a high growth potential, preferably for innovative projects conducive to job creation and the overall generation of wealth. With this end in view, it will, given that it is a public-capital fund, take up minority, temporary holdings in the share capital of non-financial SME that are not engaged in property activities and are not listed at the time the holding is taken up. Target SME are those that are at the initial development stage, although expanding, established enterprises may also be included. The average estimated duration of the fund in the investee companies’ shareholding will be five years. Furthermore, the fund may provide participating and ordinary loans in accordance with the legal regulations by which venture capital funds are ruled. Preferably, its investments will be in the region of EUR1m per project. JEREMIE In addition, ICO continues to manage the JEREMIE Fund (Joint European Resources for Micro to Medium Enterprises), set up in December 2009. The fund is part of the operative ERDF program, an initiative launched by the European Commission to facilitate the use of structural funds to finance enterprises’ R&D&i activities. The initial allocation was EUR 70 million. EUR 47.1million of which were contributed by the European Union through the Technological Fund and the rest, by ICO, which will also be responsible for its management. The main purpose of the fund is to establish a guarantee facility so as to offer security to enterprises undertaking R&D&i projects receiving aid from the Industrial Technological Development Centre (Spanish initials, CDTI), within the framework of the Technological Fund. As a result of this guarantee facility, advance payments may be offered to beneficiary enterprises so that financing will be available to them from the start of the project. Other capital funds ICO is also involved, through various contributions, in the following capital funds, all of which are under third-party management:
FonsMediterrània, FCR, a venture capital fund for investment operations in Morocco, Tunisia and Algeria.
FC2E, the Carbon Fund for the Spanish Enterprise, launched by Instituto de Crédito Oficial and Santander Investment. The first mixed-capital carbon fund managed in Spain, FC2E probably offers the best access to markets on account of its promoters’ commitment, vocation and capacity to originate projects.
Post-Kyoto Carbon Fund. Started up in 2008, its purpose is the purchase and sale of carbon credits generated in the post-Kyoto period. With the fund, the promoters are showing the market a clear sign of their confidence in the post-Kyoto system by lending their direct support to projects of environmental significance.
Marguerite Fund, a European capital fund seeking to back investments in infrastructures which contribute to the fight against climate change and enhance energy safety and transEuropean transport networks.
Major Facilities / Products
THE STATE’S FINANCIAL AGENCY
A. SECOND-FLOOR LOANS Instituto de Crédito Oficial supplies a range of second-floor facilities seeking to boost and support the productive investments of Spanish enterprises, promote the projects of SME and the self-employed and make it easier for private individuals and households to gain access to credit. The loans provided under ICO’s second-floor facilities feature long repayment terms, preferential interest rates and simple paperwork and may be obtained through leading banks and savings banks established in Spain. It is the job of these credit institutions to analyze the projects and approve the loan applications. ICO’s financing facilities are aimed at a wide variety of customers and activities: the selfemployed, SME, enterprises, private individuals and public institutions. ICO Facilities offer enterprises and the self-employed financing schemes to enable them to undertake their investment projects and meet their liquidity needs. ICO Facilities 2012 have been designed to enhance the development of sustainable investments, foster corporate growth, boost internationalization and improve the competitiveness of Spanish enterprises.
B. DIRECT FINANCING ICO finances any investment project to be executed by a Spanish enterprise, both on the domestic market and abroad, that contributes to the economic and social development of sectors such as infrastructures, telecommunications, transport, energy and the environment. In these cases, the Institute itself examines the operation, grants the loan and assumes the risk. The aims of ICO’s Direct Financing Programs are to boost productive investment projects, with special emphasis on sustainable economy investments in Spain; back the investments of Spanish enterprises abroad; and support projects with a Spanish interest that are economically, financially, technologically and commercially sound. These loans may be bilateral, syndicated or co-financed with multilateral institutions and/or local financial institutions. In this type of financing operation, ICO itself examines the operation, grants the loan and assumes the risk. Structured Finance Program Loans for the execution of projects, both in Spain and abroad, in the energy, infrastructure and environmental sectors. Projects entailing over EUR 15m, with minimum financing of EUR 10m. Under this program, the Institute provides enterprises with long-term financing in market conditions. Corporate Finance Program Loans for productive investments, both in Spain and abroad, involving more than EUR15m. Minimum amount per application: EUR10m. Long-term financing in market conditions.
C. THE STATE’S FINANCIAL AGENCY As the Financial Agency of the Spanish State, ICO provides financing on the Government’s account for the victims of serious economic crises, natural disasters and similar. In addition, the Institute manages the official financing instruments for export and development. C.1. Corporate Internationalization Fund (FIEM): to back and foster the internationalization of the Spanish economy solely on a complementary basis and in no case substituting private market activity. Background info: •
Fund established under Act 11/2010, June 28, concerning the reform of the financial backing system for the internationalization of the Spanish enterprise. The fund was initially constituted with all the assets and liabilities of a former Fund for Internationalization.
The rules and regulations deriving from the Act are contained in Royal Decree 1797/2010, December 30.
Manager: The Ministry of Economics and Competitiveness, through the Secretariat of State for Trade. Financial Agent: ICO
Objective: To back and foster the internationalization of the Spanish economy solely on a complementary basis and in no case substituting private market activity. FIEM resources: •
The funds generated from the fund’s own activity: reimbursements of principal and the collection of interest and fees charged on the loans.
Annual budget allocations assigned to the Ministry of Economics and Competitiveness.
Types of operation: •
Of a general nature: the reimbursable financing of projects, in concessionary or market conditions, tied to the acquisition of Spanish goods and services or to the execution of Spanish investment projects or those of national interest.
In special circumstances:
Non-tied reimbursable financing.
Non-reimbursable contributions or loans to multilateral development bodies or international financial institutions of which Spain is a member and in which there exists a commercial interest.
Special interest for the internationalization strategy: •
Projects furthering the internationalization of Spanish small and medium-sized enterprises.
Projects involving direct investment or the export of goods and services of Spanish origin and production accounting for a sufficiently significant percentage of the financing.
In the absence of a significant percentage of goods and services of Spanish origin and production, the existence of circumstances justifying classification as being of national interest.
States; Foreign Regional, Provincial and Local Public Administrations; Foreign Public Institutions; and foreign public and private enterprises and corporate groups and consortiums, both in developed and developing countries.
In the case of concessionary tied financing: only countries with a GDP per capita of less than US$3,945 (amount).
Not eligible: •
Heavily-indebted countries although, exceptionally, the Council of Ministers may approve reimbursable financing for HIPC at the culmination stage.
Exceptionally, FIEM financing may also be awarded to international bodies provided that the contribution is of a clear commercial interest.
Amounts financed: •
FIEM may finance up to 100% of the amount involved in the project.
In some cases, FIEM financing may be completed with:
financing from multilateral development institutions
or, in others, with commercial loans carrying official Spanish backing (MIXED LOAN).
Financial conditions: Specific conditions applicable are determined on a case-by-case basis. Arrangement and administration: As the State’s Financial Agency, ICO negotiates signs and administers FIEM financing agreements. The agreements are signed with the financial agent designated by the government of the country receiving the loan (Ministry of Finance, Central Bank, public enterprise, beneficiary). The financial agent must have its government’s sovereign guarantee or any guarantee as may be determined at the time the financing is approved. Disbursement: The financing is disbursed in accordance with the milestones established in the commercial contract signed by the exporter. Through a financial institution established in Spain, ICO pays the companies executing the project as they provide the financial institution with documentary proof of the contract’s fulfillment.
C.2. Development Promotion Fund (FONPRODE) This fund channels part of the development aid activities performed by the Ministry of Foreign Affairs and Cooperation, including those carried out jointly with development banks and funds, and also compulsory contributions to international financial institutions, the responsibility of the Ministry of Economy and Competitiveness. Background info: •
Fund established under Act 36/2010, October 22 2010, concerning the Development Promotion Fund.
Managers: the Ministry of Foreign Affairs and Cooperation, through the Secretariat of State for International Cooperation.
Financial Agent: ICO.
The purpose of FONPRODE •
Remove any purpose of a commercial nature from FONPRODE.
Untie aid financed from FONPRODE.
The full integration of FONPRODE into cooperation.
Simplify and speed up the instrument’s modus operandi.
Focus the instrument on the financing of cooperation initiatives deemed to be most necessary.
FONPRODE resources So as to provide annual coverage of FONPRODE’s funding requirements, the GeneralGovernment Budget will assign an allocation under the management of the Ministry of Foreign Affairs and Cooperation. In addition to this allocation, FONPRODE will be funded by resources from repayments or the onerous assignment of loans and credits granted, together with amounts deriving from fees and accrued interest collected on the realization of said financial assets. Types of operation •
FONPRODE finances development projects and programs in less developed countries. The financing takes the form of a State-to-State grant.
Financial contributions to development programs and international multilateral non-financial development bodies.
Technical assistance, viability studies, along with ex-ante and ex-post program evaluations.
Contributions to funds constituted at international financial development institutions for the purpose of meeting basic social needs.
Furthermore, it is possible to grant credits, loans and financing facilities in concessionary conditions, on a non-tied basis, including contributions to microfinance programs and those providing support for the productive social network.
Arrangement and administration •
As the State’s Financial Agency, ICO, in the name and on behalf of the Spanish Government and on the State’s account, arranges the agreements to be signed with the beneficiaries.
At the same time, ICO provides services relating to technical execution, accounting, cash, payment agent activities, control and, in general, all those of a financial nature.
C.3. Reciprocal Interest Adjustment Contracts (CARI) Purpose The Interest Make-Up System or Reciprocal Interest Adjustment Contract (CARI) is a system designed to provide official financial backing for the export of Spanish goods and services. Through the system, private financial entities are given an incentive to grant long-term (two or more years) export credits at fixed interest rates. These minimum rates, known as Consensus rates, are regulated by the Organization for Economic Co-operation and Development (OECD). The usefulness of the CARI System from the Spanish exporter's point of view lies in the fact that it enables him to offer the financing of the export contract by means of a long-term credit at a fixed interest rate, under conditions similar to those offered by competitors. How CARI works Every six months, the yield obtained by the financial entity on the credit granted at the Consensus rate is compared with the financing's cost on the interbank market. The difference, plus a management margin acknowledged in favor of the financial entity, is adjusted between
the entity and ICO at the end of each period compared. In accordance with this adjustment, payment is made by ICO to the financial entity or vice versa. Agents in the CARI system •
Spanish exporters and foreign importers.
Financial entities: banks, savings banks and credit co-operatives, which grant the export credits.
Spanish official bodies and state-owned entities: ICO, Directorate General for Trade and Investment (Ministry of Economy and Competitiveness) and, as applicable, Compañía Española de Seguro de Crédito a la Exportación, S.A. (CESCE).
Types of Credit. Beneficiaries of the CARI system •
Foreign buyer credit: The financial entity grants the credit to the foreign buyer who thereby becomes a borrower; the supplier or exporter receives the amount of the credit directly, as payment for the sale made.
Domestic supplier credit: In this case, it is the exporter who assumes the role of borrower. The only obligation existing between the foreign buyer and the supplier or exporter is that established under the commercial contract.
Credit facility: This is a variation of the buyer credit. The financial entity places an overall amount from which various commercial contracts may be financed at the disposal of the borrower, usually a bank in the buyer country.
Items and amounts eligible for finance A cash payment equivalent to at least 15 percent of the amount involved in the goods and services exported is required. Accordingly, the credit will finance 85 percent of the Spanish goods and services exported. This figure may include freightage, transport insurance and the insurance premium on the export credit if these services are provided by a Spanish company. Moreover, the following may be financed: 85 percent of foreign goods and services (with a limit of 15 percent of the total amount involved in the goods and services exported); 85 percent of commercial fees (with a limit of five percent of the aforementioned figure); and up to 100 percent of local expenses (with a limit of 15 percent of the aforementioned figure). Lastly, it is possible, with the authorization of the Directorate General for Trade and Investment, to include a percentage of the interest on the credit which has accrued and been capitalized during the drawdown period. Financial conditions •
Currency: The credit will be denominated in euros or in any currency quoted on the Madrid foreign exchange market.
Reimbursement period: This depends on the category of the importer-debtor country: Five years, extendible to up to eight and a half years for Category I countries (currently with GNP per capita higher than US$5,225. 10 years for other countries (Category II Countries).
Interest rate: The commercial interest reference rate (CIRR or the Consensus rate). For OECD currencies, it is calculated monthly and will depend on the option chosen.
CARI application with an executed commercial contract: the rate in force at the time of receipt of the application at ICO.
CARI application without an executed commercial contract. Two options are available: 1) The interest rate in force on the date of execution of the commercial contract or 2) the rate in force on the date of receipt of the application at ICO 0.2 percent per annum for rate reservation (120 days are reserved).
Underwriting It is incumbent on the financial entity to determine the need to underwrite the credit risk and the guarantees required. Only CESCE may provide coverage on the state’s account for political and extraordinary risks in non-OECD countries (plus the Czech Republic, Korea, Slovakia, Hungary, Mexico, Poland and Turkey) and coverage of commercial risks with terms of more than two years. Documentation required The application form has to be presented together with certain certificates to be issued by the exporter as to foreign materials, local expenses, commercial fees, any relationship with the buyer in the form of shares and holdings and the new production of the goods exported. In the case of the inclusion of foreign goods considered as Spanish because they have undergone a substantial transformation in Spain, then a certificate to the effect is required. In compliance with the OECD's new anti-corruption regulations, a sworn statement will be required as to the nonexistence of illicit payments in the assignment of the export contract. Additionally, in the course of the CARI's administrative procedure, the following documents are to be presented: the executed commercial contract, the current CESCE offer, or that of another firm of underwriters should the credit need to be underwritten) and the credit agreement executed by the financial entity and the borrower.
Water and Sanitation Cooperation Fund (FCAS) Latin America
This fund aims to provide non-reimbursable aid and, as applicable, loans, for the purpose of financing projects in the areas of water and sanitation, provisioned from the GeneralGovernment Budget through the Ministry of Foreign Affairs and Cooperation, The fund is based on a co-financing system with the national authorities of Latin American countries, which are a priority for Spanish cooperation and indirectly encourages the export of Spanish goods and services as well as Spanish investment in the fields of water and waste treatment in Latin America. The Fund’s resources FCAS is funded from allocations assigned annually in the General Government Budget and from the recovery, as applicable, of the loans granted. Administration and management The financial agent is Instituto de Crédito Oficial (ICO) which, in the name and on behalf of the Spanish Government and on the State’s account, arranges the appropriate lending contracts. In addition, the Institute provides services relating to technical execution, accounting, cash, control, collection and recovery and, in general, all those of a financial nature relative to the Fund’s activity. Geographical performance criteria
When selecting the geographical areas that benefit from the Fund, two criteria are taken into account: the level of the water and sanitation coverage rate and the levels of indebtedness of each country. Authorization of the Council of Ministers All financing facilities and projects to be financed from the Water and Sanitation Cooperation Fund must receive the prior authorization of the Council of Ministers, on the proposal of the Ministry of Foreign Affairs and Cooperation. Moreover, both the annual compensation for Instituto de Crédito Oficial and proposals for the coverage of expenses arising from the projects’ evaluation, follow-up, inspection and technical assistance must also be authorized by the Council of Ministers. Co-finance system The projects will be financed by means of co-finance with the national authorities of Spanish Cooperation member countries, in accordance with criteria regarding the level of development and needs for access to drinking water and sanitation. The co-financing requirements for each country will be established yearly in the Annual International Cooperation Plan (PACI), in accordance with criteria regarding the level of development and the needs for access to drinking water and sanitation. There are three different levels in the case of the Latin American countries. Eligible institutions In the countries, the following may benefit from the Fund: 1. -
Public Administrations – national, regional or local – of the recipient countries, providing that they have sufficient institutional capacity.
Organizations arising in civil society, cooperatives and other types of non-profit-making associations engaged in the provision of water and sanitation services or tasks connected with the provision of these public services in the region.
Eligible activities Projects financed from the Water and Sanitation Cooperation Fund must fall within one of the following scopes of performance: a)
Sustainable access to drinking water.
Sustainable access to basic sanitation services, including the management of solid waste.
Reinforcement of institutional policies and frameworks concerning water management, aimed at improving coordination and participation in the management of water.
Reinforcement of the integral management of water.
Establishment of sustainable systems for the provision of the public services of water and sanitation.
Basic rules and regulations •
The Sixty-first Additional Provision of Act 51/2007, December 26, concerning the GeneralGovernment Budget for 2008.
Royal Decree 822/2008, May 16, whereby the Water and Sanitation Cooperation Fund Office is established.
Royal Decree 1460/2009, September 28, concerning the Fund’s Organization and Operation.
D. VENTURE CAPITAL (CAPITAL AND QUASI-CAPITAL INSTRUMENTS) Through the fund known as Fond-ICO, FCR, ICO’s venture capital investee company, AXIS, offers enterprises capital and quasi-capital instruments with which to finance their growth needs. Customers Enterprises which have passed the start-up stage and wish to make capital investments to enable them to grow. Start-ups whose products, processes or services have a technological or innovative content. Customers must have a business address in Spain. Eligible investments The funds invested must be used for the following purposes: •
The acquisition of productive fixed assets, new or second-hand.
VAT on investments.
The purchase of enterprises.
Investments in R&D&I.
The following is not eligible: Liability restructuring processes and, in general, working capital requirements. Sectors of interest Preferential attention for Sustainable Economy enterprises: Environmental (eco-innovation, waste treatment and management, products made from recycled materials, etc.); Knowledge and Innovation (health and biotechnology, energy and climate change, ICT, nanoscience and nanotechnology, aeronautics, etc.); and Social (development of products to enhance the autonomy of dependants, the elderly and other vulnerable groups). Types of product Holdings in capital: •
Term: adapted to the project’s maturity period; roughly five years.
Participating loans •
Term: adapted to the project’s maturity. It may be as long as seven years, with a 2-3 year waiting period for the repayment of principal installments.
Interest: fixed and variable trances, the latter in accordance with the enterprise’s profitability.
AXIS’ holding Innovating enterprises: from EUR 750.000 to EUR1,500,000.
Consolidated and expanding enterprises: up to EUR15,000,000. Type of holding Minority holdings, avoiding a role of key partner. Business Performance 2010: In 2010, ICO granted loans for a total amount of EUR 23,346 million or 31% more than in the previous year and almost three times more than the amount granted five years before. The increase in the Institute’s lending activity is due to the growth of its two main types of loan: those granted directly by ICO to large companies (in 2010, direct loans were up by 33.7%); and, above all, second-floor loans supplied mostly to SME (up by 29.5% on the previous year). Second-floor loans are distributed through the network of private financial institutions with which the appropriate cooperation agreements are signed. In 2010, ICO further enhanced its supply by bringing in a completely new lending facility known as ICOdirecto. After it was started up in mid-2010, this facility supplied an amount of EUR 178 million in loans granted to the self-employed and small enterprises. Practically the full amount in loans arranged by the Institute in 2010 took the form of “ordinary operations”, i.e., market loans. Just EUR 1 million was distributed as loans which may be termed as “special operations”, i.e., loans directed at the victims of natural disasters. Moreover, these loans were of the second-floor type. The EUR 23,376 billion lent through ICO’s products were distributed among more than 296,000 operations, the bulk of which (over 295,000 loans) concerned the self-employed and SME. These borrowers were able to access ICO’s financing via the banks and savings banks with which they normally do business and through ICO’s IT tool for filing direct applications on the Internet. In this way, in 2010 ICO’s activity helped relieve the weak performance of the system’s total lending. In fact, loans for productive activities (excluding construction and property activities), which posted year-on-year growth of 3.1% in December 2010, would have increased by a mere 0.6% without ICO’s contribution of credit to the system. Balance and Profit and Loss Account in 2010 The rise in ICO’s activity seen since the start of the economic crisis is mirrored in its balance, which has tripled since 2005 to reach EUR 77,860 billion in 2010. This 29% upswing on 2009 is due in the main to the growth of lending investment.
Assets (million euros)
Source: Instituto de CrĂŠdito Oficial, ICO.
Last year, ICOâ€™s lending investment balance, excluding loans to credit institutions and net of provisions, shot up by 37.1% to stand at EUR 64,947 billion (without valuation adjustments registered as deposits in credit institutions). Of this balance, 64.9% corresponded to loans distributed by the Institute through its second-floor facilities, the balance of which posted a considerable increase of 43.5% in respect of the previous year.
3.3. The case of Hungary Hungary: MEHIB and EXIMBANK Hungary’s experience reveals that export-import bank (EXIMBANK) and Hungarian Export Credit Insurance Pte Ltd are the main pillars of Government’s export financing policy, particularly, to the countries with high commercial and political risks. Exports that normally can not be supported by commercial banks and insurance companies are promoted through both institutions. Hungary counts with over 540.000 enterprises in 2007, of which 94,3% are micro enterprises, 5,6 % are SMEs and only 0,1%, that is, only 800 companies have more than 250 employees.
MEHIB, Hungarian Export Credit Insurance Pte Ltd Corporate Description The Hungarian Export Credit Insurance Pte Ltd (MEHIB) was established in 1994. The owner’s rights are fully exercised on behalf of the Hungarian State indirectly by the Hungarian Development Bank Ltd as a main shareholder. The paid-in capital of the company is HUF 4.25 billion, EUR 14 million. The main aim of MEHIB’s business activities has always been and always will be to enable the entry of Hungarian companies into foreign markets; to promote Hungarian export activities; and to further the competitiveness of Hungarian exporters. In order to make this possible, MEHIB provides credit insurance for the risks that are usually not covered, or only partially covered, by private insurers in the market. Its business operations are conducted on the basis of the severally amended Act XLII of 1994 and of Government Decree 312/2001 (XII. 28.) as well as on the basis of the Act on insurance. MEHIB’s aim is to share the financial risks of export transactions, to encourage and promote the external economic relations with special emphasis on the exports of Hungarian goods and services, on strengthening the external competitiveness of exporters. Basic Data
Ownership: The owner’s rights are exercised on behalf of the Hungarian state directly by the Hungarian Development Bank Ltd. as a shareholder.
Paid-in capital of the company: HUF 4.25 billion, EUR 14 million.
Its business operations are conducted on the basis of the severally amended Act XLII of 1994 and of Government Decree 312/2001 (XII. 28.) as well as on the basis of the Act on insurance.
Legal frames: o
ACT XLII OF 1994
Government Decree 312/2001 (XII. 28.)
Act LX of 2003 on Insurers and Insurance Activities (the "2003 Insurance Act").
Structure In 2010, the Company underwent a structural reorganization. As a result of this reorganization, a classic credit insurance company structure 7 was introduced. For easier and more effective operation, the previous Board of Directors was replaced by a Supervisory Committee with fewer members. This committee acts as a supervisory board and has decision making authorities, outlined and defined in the Company Charter.
Source: Hungarian Export Credit Insurance Pte Ltd (MEHIB)
The Insurer launched a cost-efficiency program in 2010, with good results; a cost reduction of over HUF 280 Million (approx. EUR 920.000) was realized, with respect to operational costs. This amount is quite significant when compared to planned expenditures for the year. A further reduction of HUF 150 Million (EUR 500.000) with regard to operational costs was planned for 2011, in order to continue with this positive trend. MEHIBâ€™s business consists of two easily defined core activities: medium and long-term export credit and investment insurance (single transactions) and insurance for short-term, high risk transactions; and turnover-type insurance of the SME segment, with financial backing from the Hungarian government. Major Facilities Â„
Export Credit Insurance: o
Short-term insurance; policy with cover for commercial and political risks including pre-shipment credit period. Cover for purchased debts.
Medium and long-term insurance; political and commercial risks; pre-shipment and credit period; bond insurance, supplier credit, buyer credit; lease transactions.
The structure adopted by MEHIB in 2010 is similar to the private insurance companiesâ€™ organisational chart.
Investment Insurance: Cover also for investments abroad against political risks.
General Major Facilities: Products A.
SHORT TERM INSURANCE
MEDIUM AND LONG TERM INSURANCE
MEHIB – Export Credit Insurance for small and medium-sized enterprises (SMEs)
Another highlight and success of the past year was that the European Union extended MEHIB’s SME policy license 8to 31 December 2011, which allowed MEHIB to take over the export risks of small and medium-sized Hungarian companies, enabling them to reach new export markets and financing their export activities.
Hungarian small and medium-sized exporting enterprises can supply safely through export credit insurance with a maximum payment term of 12 months. Export credit insurance can be used as collateral at financing banks. Eligibility for MEHIB – SME – Export Credit Insurance All exporters registered in Hungary are eligible for insurance if they are classified as small and medium-sized enterprises under the definition in Act XXXIV of 2004 9 and their annual export is lower than EUR 2 million for more than two subsequent accounting years. Advantages of this insurance for an Exporter MEHIB assumes 95% of the risks of unsecured deferred payment; therefore the Exporter’s retained risk is only 5%. The Insurer rates the buyers and regularly reviews their financial position. Exporters can request buyer rating before the contract, whereby they increase their share of revenues on the basis of accurate buyer information and advantages deals. If the buyer does not pay, the Insurer will be involved in the collection of overdue receivables. If the Exporter’s buyer is insolvent or cannot pay, the Insurer pays 95% of the lost revenues standing in as claim payer, even if the payment is not made due to unexpected political events.
See footnote on page 11 of the report
* An SME is a business a) where the total number of employees is below 250 and b) the annual net sales revenues are not more than the HUF equivalent of EUR 50 million, or the total assets are not more than the HUF equivalent of EUR 43 million. No enterprise is considered an SME in which the direct or indirect equity participation of the State or municipality, based on equity or number of votes, is 25% either separately or in aggregate, with the exception of equity participations defined under Section 19 (1) of the SME Act.)
The export credit insurance agreement can be assigned to financing banks or factoring institutions. It can therefore serve as collateral, improving the credit rating of the exporting SME. Scope of the insurance -
Customer receivables, at least 50% of which originate from the export of Hungarian goods/services, which may be supplemented with the compensation of prime cost directly related to the production of any product or service based on a foreign trade agreement (pre-shipment module).
Commencement of the risk -
On the date of performance of foreign trade agreements.
For insurance policies supplemented with the pre-shipment module on the date of conclusion of the foreign trade agreement.
Meaning of the credit limit The credit limit is a credit facility to the buyer, provided by the Exporter, based on the expected total maximum receivables from that buyer. The Exporter applies to the Insurer for the credit limit in a particular currency, which is approved subject to buyer rating. Important: Any receivables over the credit limit shall constitute the own risk of the insured. The Exporter must apply to the Insurer for a credit limit for each buyer with whom he agrees on deferred payment. Price of the MEHIB SME Export credit insurance policy The insurance premium is defined by buyer, based on the country category and the tenor of payment, in compliance with the terms of conditions. The insurance premium is payable monthly, based on the monthly regular turnover declaration by the insured. The insurance contract enters into force when the minimum premium has been paid in the amount of HUF 200,000, EUR 665. The Insurer includes this amount into the insurance premium payable based on the monthly turnover. Credit limit establishment fee: HUF 17,000/buyer, EUR 57/buyer. Trigger date of the cause of loss -
date of the start of insolvency of the buyer as defined by law.
30 days from the buyerâ€™s due date of payment in case the payment has not been made.
for political events, the effective date of the applicable measures and resolutions and the day on which payments and transfers stopped with the country of the debtor or the country of performance defined under the foreign trade contract.
Date of indemnification by the Insurer The Insurer pays indemnity for insolvency immediately, or after a 90-day waiting period for collecting the overdue receivables in case of other insurance events, in HUF according to the claim submitted by the Exporter and accepted by the Insurer.
Procedures for issuing a MEHIB SME export credit insurance policy 1. The first step is to rate the Exporterâ€™s buyer portfolio. A credit limit may be requested for each buyer submitting the credit limit application forms. The credit limit amount is identical to the total simultaneous receivables from the specific buyer. There is an annual fee for limit establishment, published in the effective terms and conditions. A credit limit may be requested for new buyers at any time during the year. 2. MEHIB notifies in writing the Exporter applying for a limit with the result of assessment of the credit limit applications, and sends an invoice for the credit limit fee. 3. If a valid credit limit already exists, the fully completed insurance application form signed with the official company signature must be submitted with the applicable annexes. 4. If MEHIB evaluates the insurance proposal and finds it acceptable, it issues and sends out the policy to the exporting company within 15 days together with an invoice for the minimum insurance premium. (If not all data have been supplied, the Insurer requests the missing data to be provided and suspends the issue of the insurance policy.) 5. The insurance contract enters into force when the minimum insurance premium has been paid on the effective date defined as based on the application form and indicated on the insurance policy.
SHORT TERME INSURANCE Cover for pre-shipment and post-shipment risks
This facility covers exporters' risks connected to their short-term, typically unsecured and open account transactions with deferred payment to non-OECD countries. This way the facility allows the exporter to be covered against losses caused by the buyer's economic situation as well as against country risks beyond the partner's control. This insurance is guaranteed by the state budget, consequently facility C can only be concluded for the export of products with a Hungarian certificate of origin. The facility covers both the risk of the manufacturing and the credit period. B.2.
Cover for outstanding debts owed to a factor
The facility insuring purchased debts has been developed for factoring companies and financial institutions. It provides cover for purchased debts with a maximum credit period of 360 days. Insured commercial risks are insolvency and protracted default as well as additional cover can be extended to political risks. The policy works on a whole turnover basis, i.e. it covers payment risks of all purchased debts. Coverage is provided either on the basis of the amount of turnover or on the total outstanding debts. C. C.1.
MEDIUM- LONG TERM INSURANCE Cover for manufacturing risk (G)
It covers the risks during the pre-shipment period of medium and long-term transactions. Also can appear as a supplemental insurance for policyholders of supplier credit insurance (Facility "S") or of buyer credit insurance (Facility "V"). The policy acts as a security for banks in case of
export pre-finance. The insurer will pay the accounted HUF (Hungarian Forint) costs arisen in connection with the performance of the export sales contract. C.2.
Supplier credit insurance (S)
This medium-/long-term credit insurance covers the credit period following the fulfillment of the export sales contract. Cover may be granted for the buyers' payment risk, risk of a letter of credit opened in favor of the exporter, risk of promissory notes or payment risk of a bank guarantee. It is ideal for exporters requiring a bank loan for post-shipment financing. C.3.
Buyer credit insurance (V)
This medium-/long-term credit insurance covers the credit period following the fulfillment of the export sales contract. The facility covers the payment risks of loans granted by banks to foreign buyers or banks for the purchase of goods of Hungarian origin. The insurance covers claims arising from the loan agreement, i.e. the actually granted loan amount, the interests and the bank costs connected. C.4.
Medium term export finance facility for machinery, vehicles and equipments in particular with le legal right for the lesee tu use the goods for adefined period of time but without owning or having title to them. Its insurance policy covers the risk of non-payment of leasing fee in foreign or national currency. C.5.
Bank guarantee insurance
This Policy is intended for those operations in which the Exporter is required to supply a surety bond, stemming from an export contract, to the foreign buyer or authorities of the country, and covers the Institution which issues the bond on the Exporter's behalf for the risk of bond execution. When the bond is executed on the Hungarian financial institution issuing said instrument, which has been provided on behalf of the Hungarian exporter, a credit originates between the exporter and the financial institution. The policy covers the risk of non-payment of this credit. C.6.
Promote the internationalization of Hungarian companies by offering them a flexible instrument which will enable them to cover the possible losses that they could incur in their foreign investment stemming from the occurrence of political risks which, although lying beyond the control of the investor or his subsidiary, could have a considerable impact on the result of his foreign investment. Besides the asset losses resulting from the occurrence of the political risks, the insurance may also cover the loss of profits over a period of up to one year that may be incurred by the investor due to the shut-down of a subsidiary's activities because of war or political violence. C.7.
Tied Aid Insurance
Officially supported export credit may be connected to official development assistance (ODA) in two ways. First, they may be mixed with ODA, while still financing the same project (mixed credit). As the export credit is tied to purchases in the issuing country, the whole package qualifies as a tied aid credit, even if the ODA part is untied aid. Second, tied aid credits are not
very different from export credits, except in interest, grace period (the time when there is no repayment of the principal) and terms of repayment. Such credits are separated from export credit by an OECD requirement that they have a minimum degree of "softness". "Softness" is measured by a formula that compares the present value of the credit with the present value of the same amount at standardized "commercial" terms. This difference is expressed as a percentage of the credit and called "concessionality level". Thus a grant has a concessionality level of 100%, a commercial credit scores zero per cent. The higher the concessionality level, the more the tied aid credit looks like ODA, the lower, the more it looks like an export credit. Partially untied credits consist of a tied and an untied part. The latter is usually intended to finance "local cost", investment cost to be made in the importing country. This part may also be in a local currency. Partially untied aid is treated as tied aid. The policy covers the risk of nonpayment of this credit. Business Performance 2010 10
In 2010, the Insurer provided insurance cover for a turnover of over HUF 106 Billions, EUR 353 million. This figure exceeded both the planned and the realized covered turnover of 2009 by more than 30%.
MEHIB assisted Hungarian exports targeted to traditional markets by providing insurance not available from other insurance providers. The premium income of the Company in 2010 exceeded HUF 900 Million, EUR 3 million.
With regard to medium and long-term transactions, the majority of individual cover turnover was for business transactions in the Russian market; in addition to which, the Insurer issued coverage for one medium/ long-term business transaction in Belarus.
In 2010, premium income from non-marketable business transactions was HUF 426.9 Million, EUR 1,5 million which is a significant increase of 50% compared to the premium income realized in 2009. The distribution of insured turnover among export target countries did not change significantly compared to previous years; the CIS countries continued to appear at the top of the list. Exports to Russia represented the highest share, 63.9%, of the insured portfolio. Based on coverage issued, exports to Belarus, Kazakhstan, Serbia and Ukraine also represented a significant portion of the portfolio. The share of export target countries who are EU members was still low, at 5.3% of the portfolio; and MEHIB was able to issue coverage for exports to these countries specifically because of EU policies regarding SME’s, which allows coverage of these risks.
Last year of data available in all entities.
Share of each country within the insured non-marketable turnover
Source: Hungarian Export Credit Insurance Pte Ltd (MEHIB)
In 2010, as in preceding years, the largest part of the insurance portfolio, nearly 70%, represented exports to the Russian market. In addition, a relatively significant share of the insured portfolio was made up of exports to Belarus, Kazakhstan, Serbia and Ukraine, with these countries representing more than 23% of the total portfolio.
The business transactions covered by our no marketable short-term line were noticeably more diversified than the individual transactions we partnered in.
Claims paid and recovery
The marketable portfolio was sold by MEHIB and transferred out as of 1 January 2008. However, the follow-up of all transactions made to the end of 2007 in this portfolio is still being handled by the Company. These include responsibilities associated with claims management tasks; reimbursement obligations based on reinsurance, and related claims payments, which have remained the responsibility of MEHIB.
In 2010, the Insurer paid out a total of HUF 3,649.2 Million EUR 12,5 Million on claims; only a fraction of this amount, HUF 9.5 Million, EUR 3,15 Million was incurred in the marketable line. In the non-marketable line, claims of HUF 3.639,7 Million, EUR 9,35 Million have been settled. Recovery amounted to HUF 286.6 Million, EUR 0,95 Million. HUF 279.1 Million EUR 0,925 Million of this money was derived from the recovery of non-marketable losses, and HUF 7.5 Million, EUR 0,025 Million was from the recovery of marketable losses.
MEHIB has been continuously developing and improving its country risk rating system since the Company was founded, in order to facilitate the risk assessment of medium and longterm non-marketable business. Country ratings are conducted on a semi-annual basis with regards to sovereign risk, and MEHIB designs its coverage policy accordingly. Country ratings and OECD ratings are both taken into consideration during the process of determining appropriate premium policies. Prior to approving any specific insurance transaction, MEHIB conducts a detailed country analysis with regard to the specific transaction.
Analysis of the buyer risk of our transactions entails evaluating the special risks associated with different banks, state-owned companies, various business sectors and projects, while taking into consideration the country risks. MEHIB has its own bank analysis system.
In 2010, MEHIB continued the maintenance and operation of the database with bank ratings in connection with specific transactions, and in response to bank requests. In 2010, the number of banks that were assessed by the Insurer, and given limit, increased by 8 new banks and the number of banks is 138 at present. Based on the above mentioned limits, those Hungarian companies who are intending to export have access, through MEHIB, to important information related to the circumstances and backgrounds of their potential customers.
All medium and long-term transactions handled by MEHIB are governed by the company’s rating and limit system, based on a set of uniform assessment criteria. In 2010, the trend of previous years continued; an increased interest was noted, both in number and volume, in the so-called sub-sovereign risk background transactions.
The risk assessment activities which characterize short term transactions entail the full scope of the classic, so-called, underwriting activities. These includes, setting new customer limits, periodically reviewing existing limits, evaluating the requests for higher limits, and special activities.
A further significant business milestone in 2010 was the realization of a syndicated export financing transaction with the participation of several banks, to which MEHIB was the credit insurance provider. This is the first transaction of its kind that the company has been involved in since 2001.
An agreement of co-operation was signed between MEHIB and Eximbank in December 2010.
Although already outlined in 2010, another of our MEHIB’s main goals in 2011 is to work out and define the joint medium-term business strategy between MEHIB and Eximbank, for the period extending up to the end of 2014. This business strategy, which is in line with current government policies, and is in accordance with the provisions of the New Széchenyi Plan and the country’s Foreign Economy Strategy, is going to focus on promoting the growth of Hungarian exports; by effectively utilizing the budgetary resources available for export incentives and the synergies existing in the MFB group.
MEHIB intends to implement its product development concepts in accordance with the essential strategic aims of the Company, which are the following:
MEHIB playing a pro-active part in stimulating and fostering the export activities of Hungarian companies, thus enabling them to enter foreign markets;
Establishing an up-to-date, competitive, and client-friendly product range which is in line with international (primarily EU) development trends; broadening the scope of acceptable risks which are covered by MEHIB, within the framework set out by the EU legislation;
Marketing activity The main type of marketing activity MEHIB engaged in during 2010 was event marketing. The Company participated at several professional forums and formal meetings, in co-operation with state governmental institutions, which were promoting Hungarian export activities. The message, particularly towards exporting SMEs, also stresses the expert management of export risks in addition to the importance of export product quality.
Information Technology Data protection safeguards are in compliance with EU norms.
Co-operation with international organizations European Union, OCDE; Berne Union
At the end of 2010, the European Commission authorized MEHIB to provide state supported short-term export credit insurance to those small and medium-sized Hungarian enterprises whose export sales revenue does not exceed EUR 2 Million. This activity has been allowed up to 31 December 2011. 11 The most important advantage of MEHIB’s SME insurance is that it can be granted for exports to developed and developing markets, in accordance with the needs of the SME exporters.
As a European Union member credit insurer, MEHIB has fulfilled EU requirements in 2010, by making the Company’s business activities transparent for the Member Countries. The Company has met its notification obligations regarding all transactions by complying with various conditions, as required by European laws and regulations. Working in close co-operation with Eximbank, MEHIB has been formulating and submitting professional proposals on a regular basis to the decision preparatory forums of the European Union, in order to explain the national concepts for Hungarian export incentives.
MEHIB conducted its medium and long term transactions in accordance with the conventions of the OECD member countries. MEHIB has fully complied with the OECD Agreement; environmental recommendations; anti-corruption measures; the principles of sustainable crediting, which became effective from 01 January 2011; and adhered to the requirements of transparent operation.
MEHIB is an active member of the Berne Union, an international association of export credit and investment insurance companies, for 13 years. The so-called “Prague Club”, which is made up of the institutions operating in developing countries and those are preparing to become members, provides an essential professional background to MEHIB.
EXIMBANK Hungary, Hungarian Export – Import Bank Private Limited Company
For further information see “ Communication of the Commission — Temporary Union framework for State aid measures to support access to finance in the current financial and economic crisis” (2011/C 6/05)
The Hungarian Export Import Bank Private Company Limited (“Eximbank”) is a specialized credit institution wholly owned by the Hungarian State. Eximbank – together with the Hungarian Export Insurance Private Company Limited (“MEHIB”) – was established by the Act No XLII of 1994 with the main objective to facilitate the sale of Hungarian goods and services to international markets. Eximbank started its activities on May 26, 1994. In Hungary, the scope of activities of an export credit agency is split between Eximbank and MEHIB. Eximbank is engaged in export financing (both direct and indirect, and both pre- and post-shipment) and export guarantees (both loan and commercial), while MEHIB provides export credit insurance. Basic Data
Founded: 1994 (May 26).
Ownership: The Hungarian Export Import Bank Private Company Limited (“Eximbank”) is a specialized credit institution wholly owned by the Hungarian State. Its shareholders are the Hungarian Development Bank Plc. (“MFB”) (75% less 1 vote) and the Hungarian State (25% plus 1 vote) provided that the exercising of the shareholder’s rights of the Hungarian State are vested into MFB. Eximbank operates as a member of the MFB Group.
Registered capital: HUF 10.1 billion provided that its borrowings are fully guaranteed by the Hungarian State by the provision of applicable law. According to the prevailing budgetary act the maximum amount of such state guarantee is HUF 320 billion.
Legal frames: o
As an institution engaged in officially supported export financing, Eximbank shall observe the recommendations of the World Trade Organization (“WTO”) (especially the Agreement on Subsidies and Countervailing Measures), the Organization of the Economic Co-operation and Development (“OECD”) (especially the Arrangement on Guidelines for Officially Supported Export Credits) and the relevant directives of the European Union.
The operations of Eximbank are governed by the Act No XLII of 1994 and several decrees. Furthermore, just like any other credit institution in Hungary, Eximbank is subject to the Act No CXXII of 1996 on Credit Institutions and Financial Enterprises and regulated by the Hungarian Financial Supervisory Authority (“PSZÁF”).The mission of Eximbank is to enable Hungarian companies – whether small or large – to take their export opportunities by assisting in financing the export of Hungarian goods and services.
ACT XLII OF 1994 ON THE HUNGARIAN EXPORT-IMPORT BANK CORPORATION AND THE HUNGARIAN EXPORT CREDIT INSURANCE CORPORATION
GOVERNMENT DECREE 85/1998. (V. 6.) ON THE INTEREST EQUALISATION OF THE HUNGARIAN EXPORT-IMPORT BANK
ACT NO CXXII OF 1996 ON CREDIT INSTITUTIONS AND FINANCIAL ENTERPRISES
Source: Hungarian Export Import Bank Private Company Limited (“Eximbank”)
General Major Facilities: Products PRE-SHIPMENTS FACILITIES
Source: Hungarian Export Import Bank Private Company Limited (“Eximbank”)
DIRECT PRE EXPORT FACILITIES
Classic Enables Hungarian producer or exporter to finance costs connected with realization of deliveries for foreign buyer (importer) Financing covers the following costs: •
purchase of raw material and other components for export production
purchase of material in store
personal costs, i.e. wages, social and medical insurance costs
investment costs in connection with production, production extension
Eximbank offers this product for medium and large companies with at least an annual export turnover of HUF one billion. Loan Amount: Individual loans are typically a minimum of HUF 250 million EUR 0,75 Million (or equivalent foreign currency); the credit line has to be at least HUF 500 million EUR 1,66 Million (or its equivalent in foreign currency). Currency: GBP, EUR or USD. Duration: In case of variable interest rate a minimum of six months, and it could be up to 5 years (financed by the export contract / order depending on the type). In case of fixed rate loans (only EUR or USD currencies) at least two years, with up to five years. Rate: Floating rate BUBOR, EURIBOR or LIBOR USD interest rate basis. CIRR fixed interest rate basis during the term of a fixed loan. The spread will be determined, depending on transaction risk. Short-term pre-export financing revolving credit for SMEs Allows Hungarian exporters to purchase raw materials, and pay for labor and overhead to fulfill export orders. Loan Amount: Individual loan and / or credit in the range of 100 - 1000 million HUF, EUR 0,33 Million - 6 Million or equivalent amount of loan granted. The maximum funding submitted for financing the export transaction (s) value can range up to 85%. Currency: HUF, EUR occasionally. Duration: One year, extendable, at client’s request, for another year, 60 days before the maturity of the credit extended. Interest: Variable interest rate. Interest is paid monthly. The spread will be determined depending on transaction risk. Safeguards: Bank guarantee (mandatory) in addition to possible real estate mortgages, movable property mortgage, bond, surety, security, a share pledge, loan guarantees, insurance, assignment, etc...
The product is designed to provide Eximbank´s domestic credit institutions with fixed, discounted rate (CIRR-based) funds to finance export transactions of its small and mediumsized corporate clients.
GARANTIES ASSUMED BY THE BANK
Bank guarantee on export financing EXIMBANK pledges to pay to the financing bank the amount up to sum of guarantee as stated in the guarantee deed in the event that the mandator (exporter) does not keep the obligations to repay the principal of the loan provided as specified in the loan contract. This guarantee is issued in order to refinance the inputs for the production designed to be exported. Non-payment bank guarantees
Guarantee for an offer, that requires the submitter of an international tender, especially in the case of supply and assembly of machinery and transport facilities, eventually investment units, construction works abroad etc.
Guarantee for good performance, which secures meeting the requirements regarding the quality of the supplied goods or services rendered as agreed in the export contract.
Guarantee for return of advance payment, which secures the foreign customer return of any advance payments in the case the other contractual party, did not meet the requirements regarding the quantity as agreed in the export contract.
Guarantee for retainer fees, which secures the foreign customer return of any retainer fees paid in advance in the case the other contractual party did not meet the requirements regarding the quality as agreed in the export contract.
Guarantee for warranty period, which is issued for the purpose of identification and correction of mistakes and deficiencies caused by the Hungarian exporter in relation to the respective delivery of goods or rendered services. It is utilized predominantly when construction works are the subject of the contract.
Source: Hungarian Export Import Bank Private Company Limited (“Eximbank”)
BUYER’S CREDIT FACILITIES
BUYER’S CREDIT FACILITIES /PRODUCTS
With buyer’s credit facility Eximbank – directly or indirectly – provides credit with tenor of over one year (typically medium or long-term) to the partner/buyer of the Hungarian exporter, usually covered by the insurance of the Hungarian Export Credit Insurance Pte Ltd. (MEHIB). When disbursing credit to a foreign buyer – following the performance of export certified by documents – Eximbank pays the value of the goods and/or service to the exporter. Benefits for the exporter: •
improves competitiveness in the foreign market, helps to realize export orders
eliminates the payment risk associated with foreign buyers
improves liquidity, as based on the commercial contract the price due for each stage of performance is paid by Eximbank directly to the exporter.
Benefits for the buyer: •
enables the buyer to purchase Hungarian goods and/or services using low-interest credit supported by the Hungarian state;
flexible, fixed or floating-interest financing adjusted to suit the given export transaction;
the fixed interest option means predictable financing costs.
Besides direct, classic buyer’s credit facilities, Eximbank can also provide financing in an indirect manner, to the buyer’s bank, in the form of interbank buyer’s credit or an interbank buyer’s credit line. With an interbank buyer’s credit line, Eximbank provides financing through the foreign bank, making it possible to simultaneously finance the commercial contracts of several different exporters concluded with several different buyers, under predetermined terms and conditions. A.1.
Classic buyer’s credit
The classic buyer’s credit facility has been applied is order to finance the purchases of goods and/or services supplied under a commercial contract concluded between the Hungarian exporter and a foreign buyer, and is typically secured by MEHIB insurance policy). Credit amount: Typically a minimum of EUR 1 million. In transactions exceeding EUR 20 million, Eximbank usually provides the credit in a co-financing arrangement with the involvement of commercial bank(s). Eximbank participates in the financing of transactions of less than EUR 1
million on an occasional basis, mainly in relation to transactions that are important for their reference value. Currency: EUR or USD Tenor: Maximum 10-12 years, depending on the terms and conditions of the related commercial agreement. Tenor of less than two years is principally available for financing agricultural or relatively small-value manufacturing industry export transactions. Interest: Fixed, at CIRR (only in the case of tenor in excess of two years), or floating, based on EURIBOR or USD LIBOR. A.2.
Interbank buyers’ credit
Interbank Buyer’s Credit is granted for the financing, indirectly through the buyer’s bank, of the purchase of goods and/or services supplied under a commercial contract concluded between the Hungarian exporter and the foreign buyer, and is usually secured by MEHIB insurance policy (type V). In this financing structure, Eximbank provides credit to the buyer’s bank, which lends it on to the buyer. Credit amount: Typically a minimum of EUR 1 million. In transactions exceeding EUR 20 million, Eximbank usually provides the credit in a co-financing arrangement with the involvement of commercial bank(s). Eximbank participates in the financing of transactions of less than EUR 1 million on a case-by-case basis only, mainly in relation to transactions that are important for their reference value. Currency: EUR or USD. Tenor: Maximum 10-12 years, depending on the terms and conditions of the related commercial agreement. Tenor of less than two years is principally available for the funding of agricultural or relatively small-value manufacturing industry export transactions. A.3.
Project Risk Buyers’ credit
For complex projects implemented abroad by a Hungarian general contractor, Eximbank can also provide project-risk buyer’s credit to the foreign client ordering the project, when the loan is repaid from the revenue of the completed project. A.4.
Tied Aid Loans
Through the system of tied aid loans, based on intergovernmental agreement Eximbank is mandated by the Hungarian State to provide, buyer’s credit (covered by MEHIB insurance) incorporating special interest terms and aid (in the form of insurance premium), with a concessionality level of at least 35% (this being how much lower the costs of financing are in comparison to a classic buyer’s credit facility). B.
With a discounting facility, Eximbank purchases deferred-payment receivables arising from export supply, at a discounted value. When the receivable falls due, the foreign borrower performs payment to Eximbank. Benefits for the exporter: •
improves its competitive position in foreign markets; assists in securing new orders and increasing the volume of orders;
despite offering deferred-payment terms, the exporter receives the discounted value of the receivable immediately following performance, thereby improving its liquidity;
eliminates the risk to the exporter of non-payment by the buyer, or the political risk of the buyer’s country;
relieves the exporter of exchange rate and interest rate risks.
Benefits for the buyer: •
alternative form and source of financing;
expands and broadens opportunities to obtain credit;
predictable financing costs.
Eximbank only performs forfaiting and the discounting of receivables arising from supplier’s credit. It does not enter into factoring arrangements; that is, it does not undertake the discounting without recourse, under a framework agreement, of a high number of low-value receivables originating from an exporter’s deliveries made under an open supply arrangement. B.1.
Discounting of Supplier’s Credit
This classic export post-financing facility offered by Eximbank involves the purchase of export receivables originating from supplier’s credit. The discounting of receivables originating from supplier’s credit provided to the buyer by the exporter on the basis of a commercial contract is usually secured with a MEHIB insurance policy (type S). Credit amount: Typically a minimum of EUR 1 million. In transactions exceeding an amount of EUR 20 million, Eximbank usually provides the credit in a co-financing arrangement with the involvement of commercial banks. Eximbank participates in the financing of transactions of less than EUR 1 million on an ad-hoc basis, mainly in relation to transactions that are important for their reference value. Currency: EUR or USD. Tenor: Maximum 10-12 years, depending on the terms and conditions of the related commercial agreement. Tenor of less than two years is also available, for the funding of agricultural or relatively small-value manufacturing industry export transactions. B.2.
Besides its range of “classic” export credit-agency financing facilities, Eximbank offers an alternative solution in the form of its forfaiting product. Forfaiting involves the purchase, without recourse, of export-derived receivables guaranteed by a bank. This effectively turns a deferredpayment transaction into a prompt-payment transaction, thus relieving the exporter of the •
country (i.e. political and transfer),
exchange rate, and
collection risks associated with the receivable.
Instrument: The export receivable must, without exception, be a receivable that is embodied or guaranteed by one of the following unconditional, irrevocable banking instruments: •
deferred-payment letter of credit,
bank guarantee, or
bank-endorsed bill of exchange.
If the given bank is acceptable, no other securities are required. Transactions of this kind can be concluded rapidly, and require only very simple documentation, which means they entail no significant administrative and legal costs. Currency: EUR or USD. Tenor and amount: The term of the receivable must generally exceed 90 days and the amount must be at least EUR 100,000 (or the equivalent in USD). (The purchase of receivables with a shorter term and/or lower amount is also possible based on a case-by-case assessment). Beyond the term of the receivable, we take additional interest days into account at the time of the discounting, depending on the country risk. Discount interest rate: The EURIBOR or USD LIBOR corresponding to the tenor of the financing, as the reference interest rate, and a risk interest premium based on the country risk and the risk associated with the bank issuing the instrument. C.
Individual refinancing of postshipment financing credits Refinancing of individual exporter’s needs provided by intermediary of commercial banks through a trilateral lending contract between the client, the commercial bank and EXIMBANK. Currency: EUR or USD. Amount and Duration: The minimum amount is one million euros (or equivalent amount of U.S. $), the financed amount does not exceed 85% of the sales contract. The duration has to be a minimum of 2 years, up to the OECD Arrangement. Pricing: Eximbank offers a fixed interest rate on refinancing loan, based on the CIRR. The interest rate will be determined individually for each transaction. The commercial banks’ interest rate charged to their customers has to be at minimum rate CIRR. The commercial bank's interest margin charged to customers will be determined according to risk of the operation. Main aspects to consider at the reception of the application:
Hungarian suppliers to widen;
R & D activities;
Hungarian higher value added goods and services exports.
Business Performance 2010 12
On 31 December 2010 the Bank’s balance sheet total was HUF 194,70 billion, EUR 657 Million or some 8% below the figure for 2009, which had been the highest since its foundation.
Last year of data available in all entities.
Domestically-owned small and medium-sized enterprises active in sectors that showed dynamic export growth were fundamentally limited in their ability to expand into foreign markets by the deterioration in their creditworthiness resulting from the economic crisis, which led to a reduction in the commercial banks’ appetite for risk. In 2010, this represented a market-imposed limitation for Eximbank, and its restrained business activity was essentially a consequence of the above-mentioned trends.
a) New commitments
The development of Eximbank’s new commitments undertaken in the years 2009–2010 is shown in the following charts: Commitments (HUF million)
Source: Hungarian Export Import Bank Private Company Limited (“Eximbank”)
In the course of the year 2010 some HUF 52 billion, EUR 173,3 Million was disbursed, and guarantees were issued in a total of HUF 19.4 billion, EUR 64,6 Million. Due to the decline in the commercial banks’ risk appetite, Eximbank placed considerable emphasis on direct financing products.
b) Changes in portfolio figures reflecting activity levels, destinations and sectors of destination.
With a momentum reminiscent of the pre-crisis period, in 2009 the credit portfolio grew to be largest ever in the Bank’s history. The contractual repayment installments due on the portfolio amounted to HUF 102.8 billion, EUR 340 Million in 2010. Added to this, changes in the exchange rate associated with the strengthening of the forint reduced the portfolio expressed in forint terms by a further HUF 9.1 billion, EUR 30,33 Million.
Changes in the portfolio
Source: Hungarian Export Import Bank Private Company Limited (“Eximbank”)
Export destinations: Exports destinations 2010
Source: Hungarian Export Import Bank Private Company Limited (“Eximbank”)
With regard to the distribution by export market of medium and long-term loans disbursed in 2010, as in previous years the proportion of financing related to exports destined for the member states of the European Union was substantial, if slightly lower than before, at 40%. Eximbank contributed to the significant and proportionately growing volume of exports to European countries outside the EU. The financing of exports to non-European countries accounted for 12% of total disbursements made in 2010.
Distribution of export destinations: Distribution of Exports destinations 2010
Source: Hungarian Export Import Bank Private Company Limited (“Eximbank”)
The distribution by destination market of exports financed by Eximbank differs significantly from that of Hungarian exports as a whole. The main destination country for Hungarian goods and services is Germany, which accounts for almost a quarter of the loans disbursed by Eximbank, but which was nevertheless only the Bank’s second most important destination country in 2010. The highest proportion of financing in which the Bank participated was related to exports to Russia. The financing of exports to Austria took third place. The destination countries for exports supported by Eximbank reflect the fact that Eximbank finances foreign trade activities that, due to their higher risks (e.g. country risk), are excluded from traditional commercial bank financing. Since the main markets for Hungarian exports are in the European Union (and in particular, Germany), the commercial banks are more willing to finance trade with the Western European countries. Thanks to its specialist experience, Eximbank also finances foreign trade activity that could not be conducted, or that could only be conducted at significantly higher cost, if commercial-bank financing were all that was available. Among the various exports financed by Eximbank, machine and vehicle exports, as well as construction industry services and other goods exports, continue to be predominant.
Distribution of export credits by products
Almost half of the loans disbursed in 2010 facilitated the exports of manufacturing companies, the construction industry, trade and other service sectors were also wellrepresented.
Source: Hungarian Export Import Bank Private Company Limited (“Eximbank”)
Distribution of export credits by sectors:
Source: Hungarian Export Import Bank Private Company Limited (“Eximbank”)
Stability and cost-efficiency Despite the crisis, Eximbank successfully maintained the stability of its operation. Its shareholders’ equity – with subscribed capital that has remained constant at HUF 10,1 billion since 2001 EUR 33,25 million– rose by more than 7% in 2010, to HUF 16.37 billion, EUR 54,45 million while the Bank’s capital adequacy ratio was 37.31%. Eximbank realized the highest profit in its history in 2010, with a profit before tax of HUF 1.35 billion, EUR 4,49 million. In addition to the cost-saving measures introduced from the second half of the year, it was mainly one-off factors (for example the reversal of impairment previously recognized on certain major transactions) that contributed to this result. Utilization of budgetary limits As a specialized credit institution solely owned by the state and maintained for the purpose of promoting Hungarian exports, in terms of the effectiveness of Eximbank’s operations – beyond fulfillment of the owner’s requirement that the real value of shareholder’s equity be maintained (i.e. by achieving an ROE of 8.26%) – the primary aim is not to achieve the highest possible profit, but to make efficient and effective use of central budgetary resources. To assist in Eximbank’s fundraising; the central budget provides surety guarantees. In 2010, the Bank used a little over half (54%) of the HUF 320 billion, EUR 1.063 million guarantee limit allocated to it for this purpose. In 2010 Eximbank was granted a limit from the central budget of HUF 40 billion, EUR 132,95 million for export-credit guarantee assumptions (loan guarantees) and a further HUF 40 billion, EUR 132,95 million for other export-related guarantee assumptions (commercial guarantees: tender guarantees, advance repayment guarantees, performance guarantees, etc). These limits were utilized in an extent of 40% and 46% respectively. Eximbank’s overall guarantee portfolio at the end of 2010 amounted to more than HUF 38 billion, EUR 126 million, of which some 91% (HUF 34.56 billion, EUR 114,66 million) consisted of state-backed guarantees. Amount of guarantees (HUF million)
Source: Hungarian Export Import Bank Private Company Limited (“Eximbank”)
Eximbank used 43% of its HUF 5.5 billion EUR 18 million limit from the central budget for the interest-equalization of export loans with a tenor of over two years. More than two thirds of the Bank’s total discounting and loan portfolio (HUF 92 billion, EUR 305 million) consisted of interest-equalization transactions.
Distribution of loan portfolio (2010) The extent of utilization of the budgetary subsidy limit for Tied-aid loans based on intergovernmental agreements was 25% in 2010. Through these transactions, Hungarian exporters had an opportunity to enter into new markets such as Montenegro, Laos and Bosnia and Herzegovina.
Source: Hungarian Export Import Bank Private Company Limited (“Eximbank”)
3.3. The case of Slovakia Slovakia’s experience reveals that Export-Import Bank of Slovakia (EXIMBANKA) is the main pillar of Government’s export financing policy. Exports that normally can not be supported by commercial banks and insurance companies are realized by EXIMBANKA. Slovakia counts with over 57.800 enterprises with at least one employee in 2007, of which 73,1 % are micro enterprises, 25,9 % are SMEs and only 0,9%, that is, only 519 companies have more than 250 employees.
EXIMBANKA SR, Export- Import Bank of the Slovak Republic Corporate Description
Export-Import Bank of the Slovak Republic is the official Export Credit Agency. Its main goal is to increase the competitiveness of Slovak exporters at the international market via providing a wide range of export credit and investment insurance, insurance and other related financial services.
The only export credit agency between the hitherto presented that differentiates clearly in its Web pages and products’ description between SMEs and large companies.
Founded: 1997 (22 July 1997).
Legal framework: Founded under Act No. 80/1997 13 Coll. on the Export-Import Bank of the Slovak Republic, as amended by Act No. 336/1998 Coll., Act No. 214/2000 Coll., Act No. 623/2004 Coll., Act No. 688/2006 Coll., Act No. 659/2007 Coll., Act No. 567/2008 Coll. and Act No. 492/2009 Coll. (hereinafter referred to as “the Act”).
Ownership: 100% sovereign; Supervisory body: Ministry of Finance.
Registered capital: EUR 100 million.
Governing bodies: The governing bodies of EXIMBANKA SR are: the Bank Board, the Supervisory Board and the General Director. The members of these bodies have been appointed on 9th September 2010.
Bank Board: The Bank Board of EXIMBANKA SR is the statutory body of EXIMBANKA SR. The Bank Board manages the operation of EXIMBANKA SR and makes decisions on all its matters, except those delegated under the Act or the Bylaws of the Export-Import Bank of the Slovak Republic, as amended, to other bodies of EXIMBANKA SR or the Ministry of Finance of the Slovak Republic or the Government of the Slovak Republic. The Bank Board of EXIMBANKA SR has five members, including the Chief Executive Officer, three Deputy Chief Executive Officers and a member who is not an employee of EXIMBANKA SR. The authority to appoint and withdraw the Chief Executive Officer, three Deputy Chief Executive Officers and additional member of the Bank Board of EXIMBANKA SR is held by the Government of the Slovak Republic, subject to proposals of the Minister of Finance of the Slovak Republic.
Supervisory Board: The Supervisory Board of EXIMBANKA SR is the supreme audit body of EXIMBANKA SR, supervising the conduct of its operations. The Supervisory Board examines procedures concerning EXIMBANKA SR and is authorized to inspect at any time accounting documents, any other deeds including agreements entered into by EXIMBANKA SR, documents and records concerning the activities of EXIMBANKA SR.
Source: Export-Import Bank of the Slovak Republic is (“Eximbanka”)
Rating: Assigned by Moody’s Investors Services as of 1 June 2010 at the level A1/P1 with a stable outlook (the rating corresponds to the rating level of the Slovak Republic).
General Major Facilities of EXIMBANKA A. INSURANCE PRODUCTS DESIGNATED FOR SMES B. BANKING PRODUCTS DESIGNATED FOR SMES C. INSURANCE PRODUCTS D. BANKING PRODUCTS A. INSURANCE PRODUCTS DESIGNATED FOR SMES The product portfolio of the Insurance Division eliminates the risks of non-payment of receivables by the foreign buyers that accompany the export credits. Moreover the amendment to the Act on EXIMBANKA SR enables insuring the receivables on domestic market on
condition that the insured client is also an exporter and is not making business only on domestic markets. The insurance of receivables is a very favorable way of their securing, mainly for the following reasons: -
allows transfer from letter of credit, documentary collection or bank guarantee for smooth payment,
many clients use the insurance to gain financial resources, because an insured receivable is considered a certain form of collateral,
insurance of credits is reliable when penetrating new markets. EXIMBANKA SR is a partner of French CrĂŠdit Alliance and together with network of other agencies is able to provide high quality assessment of buyers including their payment discipline on worldwide level,
the recovery of the receivables from a foreign debtor is included in the price. EXIMBANKA SR uses a network of specialized agencies to recover these receivables.
upon payment of insurance indemnity, EXIMBANKA SR becomes the owner of the receivable, what improves the financial standing of the insured client.
BANKING PRODUCTS DESIGNATED FOR SMES
EXIMBANKA can help the exporter by the means of its banking products: -
to have easier access to the financing of an export contract or purchase of technologies by means of a loan from a commercial bank.
to provide direct financing of an export contract,
to provide financing of an investment aimed at production technology for producing goods for the international market,
to simply acquire advance payment guarantees from the foreign customer
offers various other forms of guarantees.
Small and medium enterprises segment products: The criterion of being included into small and medium enterprises segment is annual revenue less than EUR 50 million. The main decision criteria of loan provision are the creditworthiness of the applicant and the credibility of the projects subject to the application. The decision on approval or rejection is based on the results of financial analysis and assessment of the quality of the collateral. EXIMBANKA SR requires appropriate collateral for the credit or guarantee relationship. The interest rate or the fee charge depends on the individual transaction and risk exposure. The method and extent of guarantee on loan or guarantee relationship is considered case by case, the risk of the business case is taken into account as well as the financial situation of the applicant, whereas EXIMBANKA SR, unlike the commercial banks, stresses its main mission the support of Slovak exporters in transactions on the international market. Prerequisites for provision of the products: General conditions: -
the exporter has conducted business in the respective area for more than 1 year,
the exporter has no overdue liabilities against state,
the exporter does not show decline trends or deterioration of its position,
the exporter submits an application for the selected products as well as other documentation - see the tables - link to tabs
B.1. Loan Products Direct promissory note-based loans supporting the export activities in form of purchase of promissory note issued by the exporter to order of EXIMBANKA SR with clause, on which a guarantor, a creditworthy bank or a creditworthy enterprise can be listed. General conditions on provision of direct promissory note-based loan: -
the exporter can be provided with funds in the form of bill of exchange business - via purchase of a promissory note issued by the exporter without protest to the order of EXIMBANKA SR,
the interest rate comprises of basic interest rate of EXIMBANKA SR valid on the date of the contract signature and the risk margin,
a prerequisite of evaluation of an application for promissory note-based loan is to provide documentation proving that no commercial bank will finance the business case. This must be documented by the exporter with a confirmation from a commercial bank or with a statutory declaration in the application,
for securing the bill of exchange businesses with EXIMBANKA, the following guarantee instruments (or a combination of them) can be taken into account, in particular: a)
notarial memorandum as a general executory title for the property of the exporter,
insurance of credit risk,
collateral in the form of movable or fixed assets,
securing in the form of transfer or deposit of the receivable,
third person guarantee,
other forms of securing.
the exporters can be provided with funds in the form of bill of exchange business - via purchase of a promissory note issued by the exporter without protest to the order of EXIMBANKA SR. B.1.1 Direct bill of exchange-based loans supporting export, financing operating costs in relation to export contract realization: -
direct bill of exchange-based loans are granted for a period of maximum two years, but no longer than the period necessary for the contract realization,
financial funds of EXIMBANKA SR can be used to finance resources inevitable to keep the terms and conditions of the export contract (contracts),
B.1.2 Direct bill of exchange loans for purchase and modernization of technology -
an investment aimed at production technology for producing goods for the international market
these bill of exchange businesses are closed for a maximum of 3 years in the case of technologies with 4 years of depreciation, for a maximum of 4 years in the case of technologies with 5 years of depreciation, and for a maximum of 5 years in the case of technologies with 6 years of depreciation. The maximum period of financing thus depends on the depreciation class of the purchased technology.
B.2. Guarantee Products Payment bank guarantees: B.2.1 Bank guarantee on technologies, EXIMBANKA SR pledges to pay the guarantees to the beneficiary (commercial bank, leasing company or supplier of the technology) the amount up to the sum of guarantee as stated in the guarantee deed in the event the mandator (exporter) does not keep the obligations to repay the principal of the loan provided on the technology specified in the loan contract, leasing contract or sales contract. Conditions for provision of bank guarantee on technologies: -
the purchased technology is a part and condition of further development of the exporter activities and the production from the particular equipment is designed for international markets,
the bank guarantee contains a reduction clause, the guarantee is valid only to the amount of unpaid loan,
the guarantee is provided up to maximum 80% of the loan's principal,
the maximum and minimum amount of the guarantee in SKK or foreign currency is not limited and depends solely on the judgment of EXIMBANKA SR,
the maximum period of the guarantee is 3 years in the case of technologies with 4 years of depreciation and 5 years in the case of technologies with 6 years of depreciation period,
to ensure the recoverability of possible fulfillment of the guarantee, EXIMBANKA SR shall have (besides other guarantees) a right of lien over the purchased technology.
B.2.2 Bank guarantee on export financing, EXIMBANKA SR pledges to pay to the financing bank the amount up to sum of guarantee as stated in the guarantee deed in the event that the mandator (exporter) does not keep the obligations to repay the principal of the loan provided as specified in the loan contract. This guarantee is issued in order to refinance the inputs for the production designed to be exported. Non-payment bank guarantees B.2.3 Guarantee for an offer, that requires the submitter of an international tender, especially in the case of supply and assembly of machinery and transport facilities, eventually investment units, construction works abroad etc. B.2.4 Guarantee for good performance, which secures meeting the requirements regarding the quality of the supplied goods or services rendered as agreed in the export contract. B.2.5 Guarantee for return of advance payment, which secures the foreign customer return of any advance payments in the case the other contractual party, did not meet the requirements regarding the quantity as agreed in the export contract. B.2.6 Guarantee for retainer fees, which secures the foreign customer return of any retainer fees paid in advance in the case the other contractual party did not meet the requirements regarding the quality as agreed in the export contract.
B.2.7 Guarantee for warranty period, which is issued for the purpose of identification and correction of mistakes and deficiencies caused by the Slovak exporter in relation to the respective delivery of goods or rendered services. It is utilized predominantly when construction works are the subject of the contract. B.2.8 In the case of need, EXIMBANKA SR can issue counter guarantees in relation to bank guarantees issued by domestic or foreign commercial banks. B. 3 Bill of exchange transactions products Bill of Exchange Refinancing Loan The mechanism of provision of the loan is basically discounting a bill of exchange issued by a commercial bank to the amount of the provided export loan to producer-exporter, being in the role of the acceptor. The exporter submits to EXIMBANKA SR an application for the export support loan based on the contracts signed with foreign customers. At the same time, the client submits an application for export support loan at a commercial bank. When the commercial bank approves the credit limit (the amount/period, min 30 days, max 2 years - based on the contract between the supplier-exporter and foreign customer), the bank notifies EXIMBANKA SR that the export support loan was approved to the exporter. Based on the application of the exporter as well as the confirmation on the approval of the credit limit by the commercial bank, the bill of exchange transactions department requests documents from the exporter for processing the financial analysis. Afterwards follows the financial analysis itself as well as assessment of the commercial bank. EXIMBANKA SR gives notification of the approval or rejection by the credit committee the commercial bank and the exporter. After the support loan provision (EXIMBANKA SR refinancing the commercial bank), the exporter has to prove the purpose-specific utilization of the loan: -
with statement of account of acceptor of the bill of exchange (the exporter), proving his account in the commercial bank was credited with amount of the provided loan,
by presenting countersigned CDI (customs declaration when exporting outside EU) about actual export of the goods,
in accordance with the contracts signed outside the territory of the Slovak Republic,
by presenting the certificate of origin of the goods,
by presenting the quarterly statements of accounts of the exporter (Balance sheet, Profit and loss statement).
Purchase of Short-Term Export Receivables Within the scope of purchasing the short-term export receivables, EXIMBANKA SR offers a product similar to factoring, whereas the inevitable condition is insurance coverage of the export receivables, i.e. insurance of receivables against commercial risks at a credit insurance company. The purchase of receivables is realized with a right of recovery against the exporter (non-payment from foreign customer due to reasons outside of insured loss are thus treated) and secured by a sight draft issued by the exporter to the order of EXIMBANKA SR. The funds are released to the exporter after presenting the documentation (export invoice, shipping documents, CDI) after the framework agreement on purchase of the receivables between EXIMBANKA SR and the exporter comes to force. EXIMBANKA SR purchases the receivables from export invoices with postponed maturity from 30 to 360 days. The purchase of short-term export receivables is realized in SKK and EUR.
Purchase of Medium-Term Export Receivables Within the scope of purchasing the medium-term export receivables, EXIMBANKA SR offers a product similar to forfeiting, whereas the important condition is insurance coverage of the export receivables, i.e. insurance of receivables against commercial risks at a credit insurance company. The purchase of medium-term receivables is realized with right of recovery against the exporter (non-payment from foreign customer due to reasons outside of insured loss are thus treated) and secured by a promissory note issued by the exporter to the order of EXIMBANKA SR. The funds are released to the exporter after presenting the documentation (export invoice, shipping documents, CDI) after the framework agreement on purchase of the receivables between EXIMBANKA SR and the exporter comes to force. EXIMBANKA SR purchases the receivables from export invoices with postponed maturity from one to 5 years. The purchase of medium-term export receivables is realized in SKK and EUR. C.
By means of the insurance products, it is possible to eliminate the risks (commercial, political or combined) contingent upon the foreign debtorâ€™s failure to pay, where withholding a payment or insolvency on the part of a foreign buyer are the most frequent causes of debts remaining outstanding. The insurance of an exporterâ€™s short-term receivables relating to exports originating in the Slovak Republic against commercial risks is the latest product in the insurance products portfolio. C.1. Insurance of short-term export credits against commercial risks The insurance covers the failure to pay a debt due to insolvency or withholding a payment on the part of a private buyer. The exporter is the insured party â€“ the holder of an export contract. The exporter can be a physical or a legal entity with its registered office in the Slovak Republic. The insurance applies to insured accidents that occur outside of the territory of the Slovak Republic and does not apply to debts due to be paid prior to the goods being shipped. The insurance applies to goods and services of a consumable nature with a postponement of payment up to 180 days and goods of a long-term consumption nature with a postponement of payment of up to one year. Within the terms of this insurance it is possible to agree additional insurance against political risks. C.2.
Insurance of short-term export supplier credits against political risks
The insurance covers political risks relating to the export of goods when the exporter provides a foreign buyer with a supplier credit with a postponement of payment up to two years. The insured party is an exporter, a physical or a legal entity with its registered office in the Slovak Republic. The insurance covers risks related to political events or administrative interventions in the country of a foreign buyer, or in a third country, which have the nature of force majeure. These can, for example, be natural disasters or other circumstances due to which a public sector buyer may fail to pay without legal reason. As far as this insurance is concerned, there is a condition that the predominant part of the goods or services constituting the value of the insurance contract must be of Slovak origin.
Insurance of short-term and long-term export supplier credit against political and commercial risks
The insurance covers the political and commercial risks of an export, which is financed in the form of a supplier credit with a maturity period of longer than two years. The insured is an exporter, i.e. a legal or a physical entity, with its registered office in the territory of the Slovak Republic, who provides the supplier credit to a foreign buyer. The insurance covers the risks relating to the payment for goods and services exported abroad. The insurance is especially suitable for the exporters of production machinery and investment wholes. The insurance benefit can be pledged in favor of the commercial bank that provided the exporter with credit. The insurance is paid as a one-off payment and its amount is calculated on the basis of insured value and insurance rate. The insurance rate is determined on the basis of the terms and conditions agreed, the nature of the foreign buyer, and the country of export. The minimal amount of the insured's participation in an insurance accident is 10%. The basic terms and conditions of the insurance are as follows: - a foreign buyer must pay direct to the exporter at least 15% of the value of an export contract as of the date of delivery of goods or services at the latest, - the predominant part of the goods or services of the value of an insurance contract must be of Slovak origin. C.4.
Insurance of manufacturing risk
The insurance covers the manufacturing risk that the insured incurs prior to the shipment of goods or the granting of an export credit to a foreign buyer associated with the cancellation or interruption of the export contract due to the adverse financial situation of the foreign buyer or due to the political and economic situation in the country of export. Interruption of the export contract is defined as a period of six consecutive months. There may be a short period of manufacturing risk, i.e. not longer than two years, and a middle and longterm period, i.e. longer than two years. In effect, the insurance of manufacturing risk can be agreed only as an additional insurance to the insurance of an export supplier or buyer's credit. The insured is an exporter who usually pays the insurance as a one-off payment. Its amount ranges dependent on the risk of the country of export, the character of the foreign buyer, and the period of manufacturing risk. The insured's minimal participation in an insurance accident is 15%. C.5. Insurance of investments of Slovak legal entities abroad The insurance of investments abroad covers the political and other non-commercial risks which cause losses on the return on investments abroad due to (i) impossibility of transferring payments to the Slovak Republic, (ii) expropriation, and (iii) acts of political violence. This is insurance of a new investment or an equity investment in an already existing company or an investment in working capital to support the business expansion of a foreign company. The investment must constitute a long-term obligation on the part of the investor for a period of not less than three years and the investor's profits must depend only on the performance of the foreign company and on the returns on investments. The investment must be realized in compliance with the host country's legal regulations. It must not be at variance with any international agreement on protection and support of investments. The investor must acquire the necessary permits from the administrative bodies of the host country. The insurance covers the following political and other non-commercial risks: impossibility of transferring payments to the Slovak Republic, expropriation, and acts of political violence. The
insured is an investor – any Slovak legal entity with its registered office in the Slovak Republic that is entitled to invest in the host country's territory. The insured can specify which types of risk, or their combination, he/ she requires the insurance to cover. The insured pays the insurance in advance for the respective insurance year. The amount of the insurance depends on the scope of risks insured and on entering into the international contract of protection and support of investments with the host country. The insurance is calculated on the basis of an insurance rate, which is a percentage amount of the maximal insured value in a given insurance year. The insurance cover accounts for 90% of the insured value, which means that the insured's participation in the insurance benefit is 10%. C.6. Insurance of loans related to investments of Slovak legal entities abroad against the risk of non-payment of the credit Insurance of loans related to investments of Slovak legal entities abroad against the risk of nonpayment of the credit - the object of insurance is the receivable of the financing bank (the insured) under a loan granted to the debtor to finance investments abroad. C.7. Insurance of a confirmed export irrevocable documentary letter of credit The insurance covers the commercial and political risks relating to a partial or total failure to pay under the terms and conditions of a confirmed documentary letter of credit, which payment postponement does not usually exceed 12 months. It was to be confirmed and drawn upon in the Slovak Republic. It applies to the insurance of events that will occur outside the territory of the Slovak Republic. The Slovak Republic EXIMBANK usually provides insurance of up to 75% of the value of the documentary letter of credit. The reason for not paying the documentary letter of credit may reside in the insolvency of a foreign bank or in the withholding of the payment required under the obligations arising from the letter of credit. This situation can be caused by risks arising from political events and administrative measures in the headquarters of the issuing country or in a third country, which have, for the bank which issued the documentary letter of credit, the nature of force majeure. The bank that issues the letter of credit is the insured party. The amount of the insurance is fixed as a percentage of the sum, which the insured will obtain for the confirmation of the letter of credit acceptable to the insurer. It depends on the period during which the letter of credit is in force, the duration of an agreed postponement of maturity, i.e. maturity date of the letter of credit, and the foreign risk. The basic terms and conditions of the insurance include the fact that a predominant part of the goods or services of the total value of the export must be of Slovak origin and the insured's participation in a risk not covered by the insurance should not drop below 25% of the amount for which the letter of credit is issued. C.8. Insurance of export guarantees Insurance of bank guarantees issued in relation to export contract award or performance terms the insured is the bank which issued the guarantee (e.g. bid bond, advance payment bond, performance bond, etc.) and the insurance covers the risk of losses incurred by fair and/or unfair calling of the guarantee by the beneficiary C.9. Insurance of short-term supplier’s credits against risk of default Marketable Risk Insurance Insurance of short-term supplier’s credit against non-payment risk (“ABT”) - the cover eliminates the exporter’s exposure to the risk of non-payment of its export and/or domestic receivables.
With the short-term export supplier credit insurance, the exporter obtains cover for commercial risks (insolvency and/or protracted default), and the possibility to arrange additional cover for political risks (so called “territorial risks”). Insurance of short-term domestic receivables provides cover for client’s commercial risk. C.10. Insurance of export buyer's credit against political and commercial risks The insurance covers the political and commercial risks relating to the export, financed by a buyer's credit, which is due inside a period of two years or in a period longer than two years. The insured is the exporter's bank or other financial (commercial) company that provides the buyer's credit to the foreign buyer's bank or direct to the foreign buyer. The insurance covers the political and commercial risks relating to the payment of the buyer's credit granted plus interest. The insurance is suited to high financial volumes that relate to the export of machinery products and investment wholes. The insurance is paid as a one-off payment. Its amount is calculated on the basis of insured value and relevant insurance rate. The insurance rate is fixed, primarily, in relation to the debtor's character and risk, the country of export, and the duration of drawing upon and repayment of the export buyer's credit. The minimal amount of the insured's participation in an insurance accident is at least 5%, while not more than half can be transferred to the exporter. The basic terms and conditions of the insurance are as follows: -
the foreign buyer must pay at least 15% of the value of an export contract direct to the exporter prior to or not later than the date of delivery of the goods and services. This is not a required pre-condition if the duration of the credit granted does not exceed two years,
the predominant part of the goods and services of the value of the export contract must be of Slovak origin.
C.11. Insurance of loans to finance production destined for export against the risk of nonpayment due to exporter’s inability to comply with the export contract terms Insurance of loans to finance production destined for export against the risk of non-payment due to exporter’s inability to comply with the export contract terms - the insured is the bank providing a loan to a Slovak exporter to finance production destined for export. D. BANKING PRODUCTS EXIMBANKA SR provides banking products to enterprises with their registered offices or with permanent residence in the Slovak Republic that export products and services of predominantly Slovak origin. The products are designated for large corporations as well as for small and medium enterprises. The criterion for being included into the small and medium enterprises segment is an annual revenue less than EUR 50 million. D.1. Direct Credits -
Direct export support credits: Credit is provided for a period of up to 2 years to finance material and other export related costs, including the reimbursement of previously paid suppliers´ invoices not older than 6 months as at credit drawdown date.
Direct loans to finance investments abroad: Credit provided in order to finance investments to expand exporter’s export operations.
Buyer‘s export credits: Financing of a legal entity (included bank) abroad aimed to promote exports of Slovak business entities; this credit is granted to the foreign debtor or its bank to repay their liabilities to the Slovak exporter.
Direct credits for the purchase and upgrade of technology and associated infrastructure: Credit is granted up to 85% of the total cost of purchasing or upgrading of technology and associated infrastructure used for production destined for export, including the reimbursement of previously paid supplier’s invoices not older than 6 months as at credit drawdown date.
Direct bill-of-exchange credits for export receivables (short-term, medium- and longterm): Post-export financing of receivables up to the amount of the export invoice less the exporter’s retention agreed in the insurance policy.
D.2. Refinance Credits -
Refinance credits to support export: Refinancing of exporter’s needs provided by intermediary of commercial banks through a trilateral lending contract between the client, the commercial bank and EXIMBANKA SR.
EXIMBANKA SR guarantees the exporter’s obligations arising from the export contract to duly fulfill its quantitative and qualitative requirements. Payment bank guarantee issued by EXIMBANKA SR ensures the best protection for exporter’s business partner against exporter’s potential insolvency. D.3.1. Non-payment Bank Guarantees -
Bid bond: Bond for the bid required by the contracting party in an international public tender.
Performance bond: Bond to secure compliance with qualitative and quantitative requirements agreed in an export contract.
Advance payment bond: Bond to guarantee refund to the foreign buyer of any advance payment made by him.
Retention money bond: Bond to guarantee refund to the foreign buyer of any retention money paid by him in advance.
Warranty bond: Bond is issued to secure correction of any defects or shortcomings of export.
D.3.2. Payment Bank Guarantees -
Payment term guarantee: EXIMBANKA SR guarantees smooth payments for goods supplied.
Loan repayment guarantee: EXIMBANKA SR guarantees that the principal of credit is repaid on the due date.
Business Performance 2010 14 Banking Operations: Exports supported through banking operations in 2010 totalled EUR 2,057.76 million that is 105.14% of the amount reached in 2009.
Last year for which data are available at all the entities.
Exports Supported through Banking Operations from 2006 to 2010 (in EUR million)
Source: Export-Import Bank of the Slovak Republic is (“Eximbanka”)
Exports supported in 2010 were EUR 100.62 million higher than the result of 2009, with changed proportions of the different banking products in the total. While in 2009, 69.58% of exports were supported by way of refinance loans; in 2010 43.66% of the export support for Slovak business entities took form of bank guarantees and 29.20% of refinance loans. The proportion of large clients in the total supported exports was EUR 1,960.92 million (95.29%) and the proportion from the small and medium enterprise segment was EUR 96.84 million (4.71%). A breakdown of exports supported in 2010 by bank product and by large clients (LCs) segment and small and medium enterprises (SMEs) segment is shown in the following Table.
Exports Supported through Banking Operations in the years 2009 and 2010: Breakdown by Banking Product, SMEs and LCs (in EUR million)
Source: Export-Import Bank of the Slovak Republic is (“Eximbanka”)
As regards the structure of exports by sector supported in 2010, the major sector was the chemical industry, whose share rose year-on-year from 26.04% to 39.13%. Further significant export sectors were machinery engineering and wood-processing industries. In terms of territorial structure, major proportions of exports were those headed to countries of the European Union (83.23%) and the Commonwealth of Independent States (11.21%). Within the European Union, the main export destinations included Austria (21.42%), the Czech Republic (13.70%), Germany (12.84%), Poland (9.55%), Hungary (8.76%) and the United Kingdom (5.88%). As regards the Commonwealth of Independent States, the share of exports to Russia amounted to 10.90%.
Credit Exposure Gross receivables from lending operations as of 31 December 2010 totaled EUR 230.15 million, an increase of EUR 39.69 million (+20.84 %) on the actual result as of 31 December 2009. Total Credit Exposure as of 31 December for 2006 to 2010 (in EUR million)
Source: Export-Import Bank of the Slovak Republic is (â€œEximbankaâ€?) Note: Discount loans to banks and clients include the following banking products: discounted refinance loans to banks, direct bill-of-exchange loans to clients, and direct bill-of-exchange loans to clients for export receivables.
The total of receivables from credits granted as of 31 December 2010 comprised receivables from refinance loans to banks in the amount of 66.12 million (28.73%) and receivables from credits to clients in the amount of EUR 164.03 million (71.27%). As regards annual figures, refinance loans drawn in 2010 amounted to EUR 57.14 million, direct credits to EUR 56.91 thousand, and bill-of-exchange loans for receivables denominated in euro (drawn in EUR, USD and GBP) to EUR 167.60 million. Bank Guarantees The amount of bank guarantees issued by EXIMBANKA SR, reported as of 31 December 2010, was EUR 136.51 million, a year-on-year increase of EUR 32.45 million. Payment bank guarantees totaled EUR 66.54 million (48.74%) and non-payment bank guarantees EUR 69.97 million (51.26%). The annual amount of bank guarantees issued in 2010 was EUR 106.85 million. Receivables recovered in 2010 in the banking business totaled EUR 421,823.51. Insurance Operations Exports Supported through Insurance Operations. Exports supported by EXIMBANKA SR through insurance operations amounted in 2010 to EUR 1,138.19 million; a 36.66% increase on the actual result of 2009.
Exports Supported through Insurance Operations from 2006 to 2010 (in EUR million)
Source: Export-Import Bank of the Slovak Republic is (“Eximbanka”)
Exports supported by EXIMBANKA SR through insurance operations amounted in 2010 to EUR 1,138.19 million; a 36.66% increase on the actual result of 2009. Territorial Structure of Exports Supported through Insurance Operations: In 2010, EXIMBANKA SR insured within the frame of its export and domestic credit insurance business trade receivables for a total of 53 countries. Exports to the European Union amounted to 75.87% and exports to OECD countries to 70.08% of the total of exports supported in 2010. Exports Supported through Insurance Operations in 2009 and 2010: Breakdown by Buyer’s Country (in EUR million)
Source: Export-Import Bank of the Slovak Republic is (“Eximbanka”)
Marketable Risk Insurance: Exports supported through marketable risk insurance in 2010 totaled EUR 897.98 million, an increase of 53.01% on the actual result of 2009. Proportions of exports supported through the insurance of export receivables and domestic receivables amounted to 77.04% and 22.96%, respectively, of the total of 2010. In 2010, EXIMBANKA SR offered business entities the insurance of short-term export receivables against commercial, political and combined risks, and the insurance of domestic receivables against commercial risks.
Insurance exposure as of the end of 2010 was EUR 12.15 million higher than the previous period. Insurance exposure from the insurance of export receivables amounted to 83.92% of the total and exposure from the insurance of exporters' domestic receivables to 16.08%. Claim payments made by EXIMBANKA SR in the respective insurance business segments in 2010 significantly dropped compared to the actual results of 2009, which was mainly the result of active cooperation with the exporters insured in assessing buyers' payment morale, of efforts to avoid possible higher losses through enhanced analytical methods, and of regular and consistent risk monitoring. The quality risk assessment helped clients to prevent potential losses from business operations due to insufficient buyer’s creditworthiness. Non-marketable Risk Insurance In terms of commodity structure, the insurance of medium and long-term non-marketable risks in 2010 was mainly provided for exports of technological equipment for rubber and foodprocessing industries, and technical equipment and services for road construction and repair. The largest volumes of exports so supported were directed to the Russian Federation, Azerbaijan and Belarus. In addition to the above mentioned exports, support was also provided for investments a majority of which headed to the Czech Republic. Support for exports took form of medium- and long-term buyer’s export credit insurance against political and commercial risks and insurance of investment credits. For short-term non-marketable risk insurance, a majority of exports so supported in 2010 was destined to the Russian Federation and Algeria. In commodity structure terms, supplies for the automotive industry prevailed. Exports were supported by way of short-term supplier’s export credit insurance against political and commercial risks and manufacturing risk insurance. Non-marketable risk insurance business saw a change in the insurance structure in 2010 with medium- and long-term risk insurance prevailing over short-term risk insurance. Exports supported through medium- and long-term risk insurance in 2010 rose 83.39 % on the actual result of 2009. Insurance Exposure Insurance exposure of EXIMBANKA SR as of 31 December 2010 amounted to EUR 745.47 million. Countries with the highest insurance exposure within the EXIMBANKA SR´s portfolio included the Russian Federation, Azerbaijan, Turkey, the Slovak Republic, the Czech Republic and Kazakhstan. The other countries were mostly member states of the European Union. The total insurance exposure represents the aggregate current amount of risk underwritten under valid insurance policies and insurance commitment agreements. Claim Settlement and Debt Recovery Unpaid trade receivables notified to EXIMBANKA SR by clients insured in 2010 totaled EUR 4.14 million, with the main reason in a majority of cases (76.00 %) being protracted default. Out of the above-mentioned amount, sums recovered in 2010 before the claim payment amounted to 8.87%, receivables recovered by clients by way of claim payments to 60.88%, and 30.25% of it is at the stage of investigation and settlement. From the territorial point of view, a majority of claims notified related to debtors from Kazakhstan, Hungary, Poland, Romania, the Slovak Republic and the Ukraine. As regards
economic sectors, those with the highest risk included the steel-making, construction and machinery engineering industries. Claims paid by EXIMBANKA SR to clients insured in 2010 totaled EUR 4.58 million (actual result of 2009: EUR 3.94 million; index 2010/2009: 1.16). The highest claim payment values related to insurance for the Czech Republic, Kazakhstan and the Ukraine. Recovery by EXIMBANKA SR of underlying receivables to claims paid amounted to EUR 1.84 million (year-on-year index 2010/2009: 1.86). Of this, EUR 1.29 million was recovery of the underlying receivables to a claim paid in 2009 for Cuba. Reinsurance EXIMBANKA SR applies in the insurance of short-term export and domestic receivables riskhedging in the form of obligatory quota-share reinsurance through cooperation with reputable international reinsurers. EXIMBANKA SR continued in 2010 its significant support for the export activity of entrepreneurs from the small and medium enterprises segment, which amounts to 77.70% of the total of clients making use of short-term insurance against non-payment risk. In the period reported their share of supported exports slightly dropped, because of a reduction in the number of purchase orders from European Union countries due to the crisis. Exporters were more oriented to territories involving a higher risk and offered longer payment terms to customers, which had an effect of an increased share of the total premium written. EXIMBANKA SR presented its activities and possibilities at economic seminars, conferences, social events and specialized exhibitions, mainly in cooperation with the Slovak Chamber of Commerce and Industry (SOPK), National Agency for Development of Small and Medium Enterprises (NADSME) and Slovak Agency for Investment and Trade Development (SARIO), and during the Credit Management Conference 2010, as part of activities of the Slovak-Austrian Chamber, etc. Lectures on activities and products of EXIMBANKA SR were also presented within the frame of cooperation with the University of Economics in Bratislava. The main form of client acquisition and promotion were personal meetings as the most effective method of addressing clients. Acquisition efforts included in particular personal meetings with both existing and potential clients from the circles of exporters and commercial banks, and participation in fairs, exhibitions and promotional events.
4. Analysis of Best Practices in Export Financing which Could be Expected to Work In Ukraine 4.1. Situation of Export Finance System in Ukraine Ukraine has been one of the countries most seriously hit by the global financial and economic crisis in Eastern Europe. The crisis has had a particularly severe impact on industrial sectors such as steel production (Ukraine’s largest single export item) and the sudden reduction in access to international capital markets. Maintaining revenue from exports is critical to Ukraine's long-term development. In order to choose the best practices which could be expected to work in Ukraine a brief overview of existing facilities of state export financing systems for enterprises, specially SMEs in Ukraine is necessary and the analysis of recent Government’s initiatives. At first glance Ukraine’s business environment seems difficult for SMEs.
The World Bank’s Doing Business database provides indicators of the efforts and cost of doing business in 183 economies, as of March 2012. The results of Ukraine in some issues are getting better, but its position is worse than in 2011. Analyzing these results the situation in Ukraine with the development of SME and their access to international market is far from being optimistic. Basic indicators activity of enterprises, by size 1 in 2010 Large enterprises Number of small-scale enterprises per 10000 persons, unit
Share number of enterprises in accord with size in total indicator, %
Number of employed (staff, non-staff and non payment workers), thsd. persons
in percent(%) to total number of employed Number of employees (staff and non-staff workers), thsd. persons in percent(%) to total number of employees Average monthly wages of employees, UAN Remuneration found, mln.UAN Volume of products (works, services) sold, mln.UAN in percent(%) to total volume of products (works, services) sold 1
Excluding data for farms, bank and budget organizations.
Source: State Statistic Service of Ukraine
National statistics says that around 51,2 % of national output is generated by SMEs, which is much less compared to the developed countries. Yet, the national statistic does not provide any data on the volumes of export by SMEs. The scope and coverage of SMEs statistics are limited to: 1) the number of establishments, 2) employment contribution, and 3) regional distribution. More important data which will help policy makers and businesses to react quickly in a competitive environment are usually not available. These statistics could include: •
Export contribution of SMEs (direct and indirect contribution)
Contribution of micro enterprises/informal SMEs to GDP, etc.
Sectoral statistics/Growth potentials of industries.
It is a topic that the Ukrainian economy needs sustainable long-term growth. This can be achieved through the development of SMEs, which have considerable potential to facilitate economic and social improvement. Internationalization and international entrepreneurship among small and medium-sized enterprises (SMEs) has remained another topic of considerable contemporary relevance, principally owing to the observed growth effects of cross-border venturing, and the demonstrated capacity of SMEs to drive economic development at national, regional, and global levels (European Commission, 2007).
According to the OECD-APEC study on Removing Barriers to SME Access to International Market, which was carried out between 2005 and 2006, 15 the first and most important barrier to internationalization is related to export finance and especially short-term export finance. Barriers ranked by SMEs using the top ten ranking method Rank â€“ Weighted factor
Description of barrier
Shortage of working capital to finance exports
Identifying foreign business opportunities
Limited information to locate/analyze markets
Inability to contact potential overseas customers
Obtaining reliable foreign representation
Lack of managerial time to deal with internationalization
Inadequate quantity of and/or untrained personnel for internationalization
Difficulty in matching competitors
Lack of home government assistance/incentives
Excessive transportation costs
Source: The OECD-APEC study on Removing Barriers to SME Access to International Market
In Ukraine, this reason seems to be even more explicit given that the overall financial system is less developed than in OECD countries for instance. Another important reason for rather weak trade finance development (not only for SMEs) in the country is low business and top-management awareness of the advantages and mechanisms of trade finance and trust to the instrument. Importantly, countries exporting to Ukraine often have better developed financial markets and more export-promoting state programs, what allow their producers to offer their counteragentsâ€™ trade finance facilities. In addition, existing Ukrainian legislative framework doesnâ€™t set any privileges and preferences for use and development of trade finance instruments. There are three main sources of trade finance in Ukraine: 1)
Trade finance instruments and programs available at multilateral development institutions (EBRD, WB, IFC), which operate mostly with local banks, as the cooperation with banks ensures higher scales and effects from global financial institutions trade finance programs and requires less costs than direct financing of companies with the smaller amounts of finance required. Furthermore, these institutions set requirements for scales of projects (amounts of needed financing) and clients. Very few corporations are able to comply with due diligence requirements and procedures. Successful due-diligence at these institutions becomes the clear
The study included two surveys: one among OECD and APEC member economy policy makers and one for SMEs on their perception of the barriers to SME internationalization.
signal and guarantee for other market players to trust the screened and succeeded candidates, both banks and companies. 2)
Trade finance from global banks, represented in Ukraine in the form of subsidiaries or acquired local institutions (Credit-agricole, Raiffaisenbank Aval, OTP bank, Ukrsibbank-BNP Paribas, Swedbank, VTB bank). This group has good access to global financial sources and credit lines, primarily at maternal banks. However, limits and product strategy are often defined on the global level, not considering regional requirements and features. These banks are very risk adverse and set high eligibility criteria to their clients.
Trade finance from the own resources of local banks, which in their turn often apply to global banks and multilateral development institutions for funds in the framework of financial institutions trade finance programs (Ukreximbank, Privatbank, Prominvestbank, PUMB). These banks often may have comparatively higher tariffs for trade finance but lower eligibility criteria.
Special mention has to be done to Ukreximbank, member of the Prague Club. Since its foundation in 1992 JSC Ukreximbank is the only agent of the Cabinet of Ministers of Ukraine for execution and servicing of international loans covered by state guarantees. During this period the Bank, acting as the Financial Agent of the Cabinet of Ministers of Ukraine, served more than 150 loans under 13 credit lines (Germany, the USA, France, Italy, Japan, Switzerland, Spain. etc.) and 2 lending programs for the equivalent of USD 2.9 billion, which were used to meet the needs of the Ukrainian economy for financing of import of crucial goods, to resolve primary objectives of stabilization and restructuring of economy. The programs offered by the state-owned Ukreximbank to SME are term loans to purchase buildings, machinery or other assets possibly required to scale up for an export market, working capital lending and overdraft facility. Beyond usual loans for SMEs Ukreximbank does not have any extended facilities designed to promote SME export. Meanwhile the bank’s trade finance programs target only corporations (pre-shipment import finance, post-shipment import finance, pre-shipment export finance, post-shipment export finance, EBRD Trade Facilitation Program – TFP). To date, the only facility not provided by Ukreximbank is export credit insurance. However, Ukraine doesn’t have any state export credit agency with the typical functions and products of an ECA and no specific law regulating such activities. State support for business activity in Ukraine is provided in accordance with the newly adopted Law of Ukraine “On Development and State Support of Small and Medium Entrepreneurship in Ukraine” (up to March 2012 it was the Law of Ukraine “On State Support of Small Business”) and “On the National Program to Promote Small Business in Ukraine”. Within the National Program to Promote Small Business in Ukraine the support is provided in the following areas: •
improving the regulatory framework for business activity;
formulating national regulatory policy for entrepreneurship;
intensifying financial and credit, investment support for the small businesses;
facilitating the creation of small business development infrastructure;
implementing the regional policy to promote small business developments.
The State Budget of Ukraine for 2011 provided UAH 3,563,800 (US$ 442,000) for the needs of the National Program. For 2012 it was proposed to allocate for micro crediting of small businesses up to UAH 200 mln (US$ 24,830,000). However, these programs are not specifically focused on SME export finance or export promotion, but they are rather called to support the general SME development. Overall, Ukraine’s SME development policy is rather fragmented. Importantly, the recently adopted Law “On Development and State Support of Small and Medium Entrepreneurship in Ukraine” explicitly provides for the establishment of SME export finance facilities 16 (credit, guarantees, insurance, partial compensation of interest rates, marketing etc.). The need to launch government-supported export finance schemes (including insurance and guarantees) for SMEs has been clearly articulated in the National Action Plan to implement the Presidential Program of Reforms for 2010-2014. Subsequently, in late 2011 the Cabinet of Ministers of Ukraine developed the draft Law “On State Financial Support of Export”, which was adopted by the Parliament in the first reading (No. 9373). Notably, the issue of setting up a government-run Export Credit Agency, as a response to growing demand of trade finance, has been raised a number of times by Ukraine's stakeholders. During the past decade several attempts to pass the bill on state financial support to export activities have been undertaken (in 2002, 2005, 2009 and 2011).
Law of Ukraine “On Development and State Support of Small and Medium Entrepreneurship in Ukraine”, Article 21, para 3.
Best practices of SMEs export support
Analyzing the economic performance of the export finance system of the three countries it is clear that the demand for export short-term funding grows and most holistic and personalized approach is necessary to attend SMEs needs. SPAIN Spanish CESCE and ICO`s support for SME-s is very positive. CESCE has changed its commercial network and is now structured in 6 regional offices and 25 branches nationwide; at this manner CESCE is very close the SMEs. Both ICO and CESCE have developed new strategies. o
CESCE: with the Master Gold Solution and the marketing of its internationally famous Poliza 100, which is Multi-Buyer Export Credit Insurance 17, to new Spanish exporter companies through its 31 offices, 300 agents and in cooperation with the entrepreneurs associations
ICO: increasing the contribution of liquidity to the credit system; sharp rise in loans granted during 2010.
Consolidating the retail channel with new products: ICOdirecto and ICO-SGR.
Boosting sustainable investment: development of the Sustainable Economy Fund (Spanish initials, FES) within the framework of the Government’s Sustainable Economy Strategy.
Encouraging internationalization: the promotion of loans to finance exports.
Innovating in products, processes and distribution channels: design of a technological platform through which to channel entrepreneurs’ relations with ICO via Internet. The platform is known as the Financial Facilitator: http://www.facilitadorfinanciero.es.
Closer contact with the client: the Financial Facilitator; the new commercial website (http://www. icodirecto.es); cooperation agreements with the Chambers of Commerce, Government Delegations, Reciprocal Guarantee Companies (Spanish initials, SGR) in autonomous communities and employers’ associations.
Risk Mitigation Tool: insure export accounts receivable against nonpayment by international buyers. Marketing Tool: extend competitive credit terms to international buyers Financing Aid: arrange attractive financing with the exporter’s lender by using insured export-related accounts receivable as additional collateral
Example: CESCE Country Risk Tool
STRENGTHS OF SPANISH TRADE FINANCE SYSTEM
Wide product range
Variable price system
CESNET, access to insurance policy online
Internationalization of ECA
Transparency and respect to OECD rules
WEAKNESSES OF SPANISH TRADE FINANCE SYSTEM
Risks concentrated developed countries
Need of more online tools
Conceptualization of knowledge
More transparency in SMEs information
SLOVAKIA The Slovak EXIMBANKA SR continued in 2010 its significant support for the export activity of the business segment of small and medium enterprises, which amounts to 77.70% of the total number of clients making use of short-term insurance against non-payment risk. In the period reported its share of supported exports slightly dropped, because of a reduction in the number of purchase orders from European Union countries due to the crisis. Exporters were more oriented to territories involving a higher risk and offered longer payment terms to customers, which had an effect on an increased share of the total premium written. EXIMBANKA SR presented its activities and possibilities at economic seminars, conferences, social events and specialized exhibitions, mainly in cooperation with the Slovak Chamber of Commerce and Industry (SOPK), National Agency for Development of Small and Medium Enterprises (NADSME) and Slovak Agency for Investment and Trade Development (SARIO), and during the Credit Management Conference 2010, as part of activities of the Slovak-Austrian Chamber, etc. Lectures on activities and products of EXIMBANKA SR were also presented within the frame of cooperation with the University of Economics in Bratislava. The main form of client acquisition and promotion were personal meetings, as it is the most effective method of addressing clients. Acquisition efforts included in particular personal meetings with both existing and potential clients from the circles of exporters and commercial banks, and participation in fairs, exhibitions and promotional events. STRENGTHS OF SLOVAKIAN TRADE FINANCE SYSTEM
WEAKNESSES OF SLOVAKIAN TRADE FINANCE SYSTEM
Wide product and very clearly presented product range for SMEs
Urgent need to develop online tools with SMEs
Direct and continous marketing with SMEs
No CIRR system or not explained clearly
Transparency OECD rules
Excellent capacity of collaboration on national and international scale
HUNGARY In 2010, MEHIB provided insurance cover for a turnover of over EUR 353 million. This figure exceeded both the planned and the realized covered turnover of 2009 by more than 30%. MEHIB assisted Hungarian exports targeted to traditional markets by providing insurance not available from other insurance providers and knows and uses very well for the benefit of Hungarian SMEs The Hungarian Eximbank in 2012 operates export credit financing program for small and medium-sized business at fixed rate, medium-term (2-5 years) Euro credit facility, at this manner the SMEs could avoid the risk of exchange rate between HUF and Euro and the fixed rate allows a better financial planning for them Under the program for another year, Eximbank signed a refinancing credit line contracts with nine commercial bank: Budapest Bank, CIB, Commerzank, K & H, MKB, OTP Bank, Raiffeisen Bank, Savings Bank, Unicredit.
STRENGTHS OF HUNGARIAN FINANCE
WEAKNESSES OF HUNGARIAN FINANCE SYSTEM
Transparency and respect to OECD rules
Good and adequate regulatory framework
Excellent knowledge of intenational rules
Active and innovative insurance products development
Worrisome financial situation of the national budget
High level of non-payment on nonmarketable segments.
Need of consolidation of the new organisational chart.
Need to develop credit facilities for SMEs
Summarizing the analysis it has to be remarked that the three countries have introduced into their official export finance systems special schemes and services provided through export credit agencies to assist SMEs exporters. These initiatives include information programmes, simple-track application procedures, and special export insurance, guarantees and other products. SME programmes were in part prompted by the difficulties encountered by SMEs enterprises in applying for and receiving export credits and related services. Complaints from SMEs firms included burdensome procedures and paperwork, the high cost and complexity of policies, the lack of adequate risk coverage, insufficient export credits, and the need generally for more support for SMEs exporters. In the three countries most exporters are small firms and they receive the greatest share of export-related services. Efforts to improve the quality and efficiency of export credit products and services are primarily to the benefit of smaller enterprises.
Providing information to SME exporters Due to information gaps and asymmetries, many SMEs may be unaware of the export credit products and services available. All the export credit agencies in the three analyzed countries make special efforts to raise awareness among SMEs about official export credit programmes. Information on export credit products and export support services for SMEs tends to be disseminated through public seminars, private events (e.g. trade shows), printed media and the Internet. CESCE in Spain has a telephone hotline providing personal support regarding export credit services and a special blog designed for SMEs. EXIMBANKA SR has initiated "SME road shows" or a series of regional seminars to enable an exchange of information between the Bank and potential SME customers. The five presented institutions take part in seminars organised by commercial banks or Export Promotion Bodies or Investment and Trade Development Agencies in order to reach SMEs firms. The five export credit agencies have introduced streamlined or simplified application and review procedures for export credit services for SMEs. Small exporters, which are usually less experienced and require more hand-holding to guide them through an export credit system, generally have different needs than larger companies. Providing export credits to small exporters The share and type of export credits extended to SME exporters varies across the three countries, due to differing rules. Broadly defined, an export credit is an insurance, guarantee or financing arrangement which enables a foreign buyer of exported goods and/or services to defer payment over a period of time. Export credits are generally divided into short-term (usually under two years), medium-term (usually two to five years) and long-term (usually over five years). Export credits may take the form of supplier credits, extended by the exporter, or buyer credits, where the exporter's bank or other financial institution lends to the buyer (or their bank). Official support through export credit agencies may be provided as: 1) "pure cover", i.e. insurance or guarantees given to exporters or lending institutions without financing support; 2) financing support, i.e. direct credits/financing,refinancing and interest rate support, and/or 3) aid financing, i.e. credits and grants. In the European Union, short-term credits have been mainly â€œprivatisedâ€? until the crisis of 2008. The Communication (EC, 2001) 18 of the European Commission to the EU Member States effectively stipulates that official export credit support should not be provided for "marketable" risks. As a result, EU countries did not generally provide export credits for intra-EU trade or 18
http://ec.europa.eu/trade/creating-opportunities/trade-topics/export-credits/index_en.htmOfficial Journal C 217, 02/08/2001 P. 0002 - 0003. Definition of marketable risks modified, period of application of the communication extended
trade with most other OECD countries paid for under short payment terms (normally cash up to two years) for either large or small firms until 2005. Several European countries do provide export credits to SMEs for medium and longer-term payment periods. However, short-term business, which generally concerns raw materials, commodities and manufactured goods, is more likely within the realm of smaller firms than medium- and longer-term business, which are generally capital goods and large business projects. In Slovakia exporters have represented more than 70% of the number of customers in recent years. In Spain, more than 295000 Spanish SME-s achieved a credit facitlity in 2010 through ICO. Designing special products for small exporters In the three countries, small firms are the major clients of export credit agencies, which do have a special category of products designed for SMEs, (including EXIMBANK Hungary this year) and express their intention o design export-related products and services with the special needs of SME exporters. Short-term products The three countries are introducing short-term products, such as export credit insurance and export-related capital guarantees, specially designed for small exporters. In Hungary, MEHIB has the SME insurance package which gives protection against both marketable and non-marketable risks to SMEs registered in Hungary where due payment expiry in their export contracts does not exceed 180 days. The minimum lending and transaction amount limits were eased or lifted for direct loans supporting the export transactions of SMEs while the scope of items eligible wextended. CESCE has CESNET online, which provides Spanish, French, and Portuguese SMEs with an on-line insurability opinion on foreign buyers, based on CESCEâ€™s group data base, PROSPECTA INTERNACIONAL with more than 200 millions of firms registered worldwide. Medium and long-term products The three countries have medium and long-term products specially designed for SMEs. It is sense to mention specially two products: 1) the surety bonds execution facility which is available to exporters with the technical and financial capacity to undertake export contracts for which bond support is required (the facility only requires the exporter to lodge a 1% security in the case od Spain); or the Documentary Credit Guarantee which allows the exporterâ€™s bank to discount irrevocable documentary credits issued in relation to an export contract by mitigating the risk on the issuing bank through the support of an guarantee. Other products Other products and services are being offered to small exporters by export credit agencies which do not fall within the timeframe of short, medium or longer-term. These include programmes for the general financing to support the domestic operations and
internationalisation efforts of SMEs (Spain and Slovakia). Several initiatives were made to assist small firms in obtaining working capital to initiate or extend their export activities. With ICO the Working Capital programme provides banks with a risk-shared guarantee for working capital advanced to deliver on a specific SME export contract. Export credit agencies have also developed special programmes involving private sector intermediaries (e.g. banks, insurance companies, brokers) designed to encourage SME exporting activities. CESCE leverages its resources by partnering with region and state organisations, trade associations, lenders and others with knowledge of the local exporting community, which help CESCE to reach many small businesses unaware of the services available to them. CESCE through CESNET has several â€œumbrella typeâ€? short-term credit insurance policies with selected banks and financial intermediaries that provide cover for receivables that are discounted by the bank or financial intermediary and which are used by SME exporters. Through the Master Gold Policy Program combines CESCE insurance with private invoice and collection services.
Strategic Recommendations for Ukraine Based on Best Practices
There are innumerable benefits for every country to be or to become an integrated part of global trade. The Government should consider exporting and especially exporting by SMEs as an economic enabler to maintain and create jobs. Export Credit Finance and Insurance System for trade are vital factor for boosting cross border trade volumes, for fostering prosperous, sustainable development and thus creating wealth for a nation and its people. Furthermore, a number of factors will act as a drag on the country’s ability to grow its exports. These include:
The economies of trading partners.
Bank lending constraints.
Bank liquidity for large contracts.
Regulation, including Basle III and Solvency II.
The development of the private sector plays an important role within a trade finance system setting up initiative. This sector is often described as the ‘engine of growth’ and is a key in spurring economic development in transition countries. Additionally, exports and investments abroad are vital for growth and successful international trade integration. Private companies engaging in cross border transactions often face significant financing needs as well as inherently increased risks. Especially when it comes to projects in challenging foreign environments, private companies may be unable to obtain financing or to adequately mitigate the risks of their involvement, unless they can draw on official sources of funding or official trade and investment insurance schemes. The absence of a fully‐fledged ECA leaves companies at a disadvantage on the international stage. This gap can be effectively closed by the conception and implementation of an Agency on Export Credit and Investment Insurance. Their common aim is to safeguard and to enhance the competitiveness of national exporters and to diversify the local economy. Moreover, it is in exporting companies, especially in the SME sector where many highly qualified jobs are created and secured by Export Credit Agencies’ activities. For the setting‐up of an Export Credit Agency the following phases are suggested: Phase 1 could be based on a Technical Assistance Agreement with national and/or international experts in order to define the strategy of the Agency, which, at a later stage, could be complemented by an Operative Level Agreement in order to adapt the Operation Model of the Agency to the countries specific needs. In Phase 2, the basic design of the ECA with essential organisational capacities to operate future services independently and/or in cooperation with external partners will be developed. The ECA’s future role in the promotion of SME exports and the country's role in an international context should be determined.
Phase 3 encompasses the actual construction work, i.e. the development of a legal framework, premium tools, the products and corresponding manuals, market penetration plans as well as workflow analysis and defining human resources requirements. It is also strongly recommended to develop internal procedures such as risk guidelines, risk management procedures and a Corporate Governance including the respective Institutional Bodies during this phase. Phase 4 contains capacity building activities in order to prepare the ECA to operate on a standalone basis. Finally, Phase 5 accompanies the start of the actual operation of the ECA and ensures the necessary benchmarking and performance analysis after the initial kick off. This approach and the recommendations could be adapted to the special needs of Ukraine. 1.
Recommendation: knowledge and analysis of statistics on Ukrainian SMEs
While the SME sector is recognized as the focal point for growth that will ensure that the Ukrainian economy moves forward despite the threats of an unfavourable global environment, the overall fiscal condition of the country prevents it from being given utmost financial support. It would be very useful to conceptualize an SME Database Project or to summarize efforts made in this field in order to know better the corporate profiles of SMEs. The database would be an efficient tool for monitoring the assistance given by the different agencies to each SME firm. 2.
Recommendation: explore the results and best practices EU EU-Ukraine cooperation in the SMEs sector
For EU-Ukraine relations, SMEs have long been a key sector for co-operation. The EU-Ukraine Association Agenda 19 commits partners to work together on implementation of an SME policy based on EU best practice and maintain a regular dialogue on industrial and enterprise policy. It would be very useful to know and summarize the lessons learned in the field of export finance. 3.
Recommendation: use national and international experience in trade finance system
In order to assure the most cost effective solutions for Ukraine it would be recommended to analyze the capacities and abilities of Ukreximbank to make it a â€œclassicâ€? Export Credit Agency and cut the functions of a universal bank which it performs today, if itâ€™s possible. Ukreximbank is already the member of Prague club which comprises financial institutions involved in insuring or guaranteeing export credit transactions and in underwriting political risk, recently founded or smaller than the members of the Berne Union. Naturally the export finance institution is not the only responsible for export promotion of SMEs and the professionals of Ukreximbank have to have a responsibility in sharing their knowledge 19
EU-Ukraine Association Agenda http://eeas.europa.eu/ukraine/docs/2010_eu_ukraine_association_agenda_en.pdf
and experience with regulators on new forms of financing. THERE IS NO NEED TO REINVENT THE WHEEL 4.
Recommendation: discuss and elaborate an adequate regulatory framework, considering WTO, OECD and EU regulatory environment and UN Global Compact's ten principles 20 .
Regulations should ensure a framework within which SMEs are given a fair opportunity to compete. Regulations ensuring the availability of capital and permitting the access to transparent export finance tools may significantly affect the performance of SMEs. Concerning the export finance system the regulatory framework has to clarify: 1)
Clear definition of the functions to be performed by the export finance system (credit institution; insurance company; guarantees, and or other export promotion tasks)
Detailed specification of the service activities to be provided by the export finance system relating to export financing (service activities, financial service activities, investment service activities, etc.).
Special attention should be paid to the anticorruption, due diligence procedures and adoption of a risk assessment methodology (country risks, commercial risks, political risks, classifications, ratings etc.) compliant with international standards;
Delimitation of the target audience who could benefit of its services and products: resident, non-resident credit institutions, economic associations, individual firms, individual entrepreneurs, etc.
It is worth to take into account the needs of small and medium-sized businesses, and develop specific tools for SMEs access to finance;
Scope of the activities to be covered:
marketable and/or non-marketable risks;
commercial (default payment; insolvency; refusal of the goods) / political risks (war, disturbances, …);
full period of cover;
Payment obligations of the export finance system in each of the cases.
Budgetary and Governmental Relations
Guarantee from Government of stable and long-term support to export finance system.
Confirmation from government that it will provide first demand guarantees for the payment obligations undertaken by the ECA.
Guarantee that the National Budget shall directly provide the necessary resources to fulfil the payment obligations, in accordance with the conditions and the method laid down in a government decree, differentiating between the interest on the credits granted and the financing costs dedicated for that purpose.
Annual determination (in National Budget) of the ceiling of the total sum of export credit guarantees the export credit finance system may undertake under the first demand guarantee by the State, as well as the ceiling of the sum total of other guarantee transactions for exportation, and the ceiling of the sum total of insurance obligations and/or obligations arising from reinsurance undertaken by the export finance system under the first demand guarantee by the State.
Appointment of the entity responsible (the export finance system institute or other), on behalf of the State and to the benefit of the National Budget, for recovering the claims resulting from the honouring of the guarantee transactions that may be entered into, at the expense of the National Budget, as well as the interests and default interests on the claims, and the outstanding claims resulting from claims insured under conditions laid down in a government decree and insurance policies taken over from legal predecessors.
Government’s capacity to regulate in a decree the specialties of the annual obligation of the export finance system to prepare a financial statement and of bookkeeping.
Rule of Organization
Definition of the bodies that will regulate export finance system’s activity.
Board of Directors: composition and entity responsible for the appointment of its members; incompatibilities, if applicable.
Supervisory Board: specification of the scope of the inspection to carry out (management, administration …); entity responsible for the appointment of its members; incompatibilities, if applicable.
Establishment of the term of appointment (indefinite; … years).
Limitation of the amount to be exposed against a client or group of clients in relation to the solvency margin of the export credit finance system
Exceptions to this rule, if applicable.
Secrecy obligation concerning provision of data on transactions.
Applicability of this secrecy obligation towards the Ministry headed by the Minister responsible for public finances.
Specification of the Government’s authority, by a decree law, in order to determine the specialties of the annual obligations of financial/insurance companies to prepare a financial statement and of bookkeeping;
It is extremely important to ensure that a form of state financial support to export meets requirements of WTO Agreement on Subsidies and Countervailing Measures, OECD Arrangement for Officially Supported Export Credits. Consider harmonization of the draft
law on ECA with EU Directive 98/29/EC as of 7 May 1998 on harmonization of the main provisions concerning export credit insurance for transactions with medium and long-term cover especially in wake of forthcoming EU-Ukraine Association Agreement; •
Regulate the terms and detailed rules of the interest adjustment system and the export credit guarantees that may be undertaken by the ECA under the first demand guarantee by the State, and also the terms and detailed rules of other export-oriented guarantee transactions under the first demand guarantee by the State.
Determine the terms of the tied aid credits that may be given by the ECA and the detailed rules of granting tied aid credits.
Determine the detailed rules of the settlement of accounts by the ECA and with the National Budget as well as the rate of the commission fee.
Attention should also be paid to human rights and environmental due diligence, which appear to be recent trends in export finance system development;
Include a harmonization clause to ensure compliance with other existing laws;
The characteristics of trade must be better understood by the regulators. Likewise, the relative riskiness of each of the various financing instruments must be specified; the professionals of trade finance have a responsibility in sharing their experience with regulators on new forms of financing. 5.
Recommendation: use on line applications from the start-up of new tools and best practices in trade finance
It is recommended to ensure the access of SMEs to transparent and on-line information and application forms of the export finance system of Ukraine. The automation of cross-border payment systems does not change the nature of trade financing, but it lowers considerably its cost by cutting on bureaucracy and time. As a result, bankers and traders accessing these new forms of international "e-banking" are becoming more cost-effective and competitive. Web portals provide for electronic preparation of documents and exchange, the reconciliation of purchase orders and invoices and the actual payment, the on-line provision of credit by banks and insurance of such credit by private sector insurer, all of them being linked within a single electronic system. On-line trade finance not only cuts cost and saves time, but it also spreads vital information among suppliers, customers and their financial intermediaries on the transaction(including trade documents), thereby creating a sense of security and a reduction of risk across the supply chain. In that way, customers feel more comfortable to offer early payments, suppliers can provide discounts, and in the end such suppliers can permanently reduce prices when contracts are renegotiated. The best practices in export finance tools on line could be appreciated both on SPAIN, CESCE and ICO and on USA Ex-im 21.
Web site: https://eximonline.exim.gov/
Agreement on Subsidies and Countervailing Measures
Compañia Española de Seguros de Crédito a la Exportación, Spanish Credit Insurance Corporation and Group
Commonwealth of Independent States.
Export Credit Agency
Magyar Export-import Bank Zrt, Eximbank Hungary Pte Ltd
Exportno-importná banka Slovenskej Republiky SR, Export-Import bank of the Slovak Republic
Highly Indebted Poor Countries
Instituto de Crédito Oficial, Spanish Credit Agency
Magyar Exporthitel Biztosító Zrt., Hungarian Export Credit Insurance Pte Ltd
Small and medium sized enterprises.
Organisation for Economic Co-operation and Development
Arrangement on Guidelines for Officially Supported Export Credits
Political Risk Insurance
United Nations Development Programme.
Export-Import bank of the United States of America.
World Trade Organization
AGREEMENT ON SUBSIDIES AND COUNTERVAILING MEASURES, WTO
Spain, CESCE, Law Decree 1327/1999 (Spanish)
Spain, CESCE, Decree 3138/1971 (Spanish)
Spain, CESCE, Law 30/2007 (Spanish)
Spain, CESCE, ITC 962/2006 (Spanish)
Spain, CESCE, Decree 180/2003 (Spanish)
Spain, CESCE, Law 33/2003 (Spanish)
Spain, CESCE, Law 10/1970 (Spanish)
Spain, ICO, Real Decree 390/2011 (Spanish)
Spain, ICO, Real Decree 706/1999 (Spanish)
Spain, ICO, Sixth Additional Disposition of Real Decree Law 12/1995 (Spanish)
Hungary, MEHIB and EXIMBANK Act XLII of 1994
Hungary, MEHIB Government Decree 312/2001
Hungary, EXIMBANK, Government Decree 85/1998
Slovak Rep., EXIMBANKA Act 80/1997
Trade Profile, Spain
Trade Profile, Hungary
Trade Profile, Slovak Republic
Trade Profile, Ukraine
BIBLIOGRAPHY CESCE, Credit Insurance Corporation and Group
European Union •
http://ec.europa.eu/trade/creating-opportunities/trade topics/export-credits/index_en.htm Official Journal C 325, 22/12/2005 P. 0022 – 0023. Use of escape clause for SMEs defined. 22 December 2005.
http://ec.europa.eu/trade/creating-opportunities/trade-topics/exportcredits/index_en.htmOfficial Journal C 217, 02/08/2001 P. 0002 - 0003. Definition of marketable risks modified, period of application of the communication extended
http://ec.europa.eu/trade/creating-opportunities/trade topics/export-credits/index_en.htm“ Communication of the Commission — Temporary Union framework for State aid measures to support access to finance in the current financial and economic crisis”
EU-Ukraine Association Agenda •
Export-Import Bank of the United States
EXIMBANKA SR, Export-Import Bank of the Slovak Republic
EXIMBANK Hungary, Hungarian Export-Import Bank Private Limited Company
ICO, Instituto de Crédito Oficial
Law of Ukraine “On Development and State Support of Small and Medium Entrepreneurship in Ukraine”, Article 21, para 3.
MEHIB, Hungarian Export Credit Insurance Pte Ltd
OECD, Organisation for Economic Co-operation and Development •
http://www.oecd.org/department/0,3355,en_2649_34181_1_1_1_1_1,00.html: Environment and Export Credits
http://www.oecd.org/department/0,3355,en_2649_34177_1_1_1_1_1,00.html: and Export Credits
http://www.oecd.org/department/0,3355,en_2649_34179_1_1_1_1_1,00.html: Sustainable Lending and Export Credits
http://www.oecd.org/dataoecd/16/26/43357832.pdf: The OECD-APEC study on Removing Barriers to SME Access to International Market
UN Global Compact
WTO, World Trade Organization •
http://www.wto.org/english/res_e/booksp_e/discussion_papers2_e.pdf: Improving the Availability of Trade Finance during Financial Crises
report on best practices on export financing prepared by international expert Maria Kovesdi for UNDP Aid for Trade Project in Ukraine