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After a lengthy slowdown in project activity, demand for project
finance and political risk insurance (PRI) in Asia, the Pacific Rim
and Southern Africa is increasing, particularly for natural
resource projects, according to Australia's export credit agency,
Export Finance and Insurance Corporation (EFIC).
EFIC, a self-funded corporation wholly owned by the Australian Commonwealth Government, expects to play a major role in this growing market. Michael Clarey, Head of Structured Trade and Project Finance, points out that EFIC is something of a hybrid. ?We're a bit like a combination of US Eximbank and the US's Overseas Private Investment Corporation. We do everything from performance bonding to export financing and insuring overseas investment.? EFIC's main product lines are export finance loans and guarantees, political risk insurance, medium term payment insurance, export working capital guarantees, and performance bonds.
EFIC has built up considerable expertise and experience in the Asia Pacific and Southern African regions and the mining and natural resources industries and is well placed to support investors and lenders as demand for PRI increases. For more than 40 years, EFIC has been involved in supporting projects in many high-risk countries in both regions. Clarey notes that key staff members within the corporation also have decades of experience of project finance, some having held high-level positions at major global banking institutions and other export credit agencies.
As Australia's export credit agency, EFIC also has a comparative advantage in country risk assessment:
? EFIC has underwritten exports and investments in both emerging and mature markets.
? EFIC's information sources extend beyond traditional commercial sources and include other Export Credit Agencies worldwide, the IMF, the World Bank, and Australian diplomatic posts.
? EFIC can accept higher risk as it has experience in moderate- to high-risk markets and has the capacity to spread these risks over a larger portfolio.
EFIC's strengths are highlighted in the role that the corporation is playing in Australian mining company, Oxiana Resources' copper and gold project in the Sepon Project Development Area in southeastern Laos. According to Clarey, Sepon represents the first major international mining project in this geographic area for some time. Gold production is already underway at the mine and the project is expected to reach full gold production in the first quarter of 2003.
Clarey comments, ?although Oxiana's directors and managers felt that it was particularly appropriate to have PRI, EFIC was only appointed after a competitive process and proposal stage.? He adds, ?EFIC's appointment was partly in recognition of our strong position in this region and in the industry. Australia's good relations with Laos at the sovereign level were also viewed as a real positive.?
During the project, EFIC provided PRI cover both at the feasibility study stage and for the first phase investment aimed at developing the gold resources at Sepon. EFIC is keen to play a further role in the project by covering the second phase, which will see the extraction of Sepon's copper reserves and which is scheduled to begin at the end of this year.
EFIC now expects to see new natural resource projects and investment in the Asia-Pacific and Southern Africa in countries as diverse as Fiji, Papua New Guinea, and Mozambique. Even more expansive opportunities are forecast over the next few years in the region, in the oil and gas industries.
Due to political and economic difficulties, however, there has been limited activity recently in Indonesia, a country with some of Asia's richest natural resource deposits. Nevertheless the situation has improved markedly since the Asian crisis and Clarey notes that EFIC is interested in playing a part in new projects in the country, while remaining sensitive to the exact location of the project.
EFIC has also indicated its willingness to consider playing a part in the development of the Bayu-Undan field gas reserves in East Timor, Asia's newest nation. Plans to exploit the gas reserves have been delayed. ?But the various interested parties are increasingly active in discussing potential projects and we are very interested in being involved,? says Clarey.
In Southern Africa, EFIC is currently looking at providing PRI cover for the lenders to a natural gas project in Mozambique. The project involves the construction of a 865km long pipeline to transport natural gas from Temane in Mozambique to South African petrochemicals company, Sasol's, Secunda Plant in South Africa's Mpumalanga province. It is expected that the bridge facility to fund the development will be replaced with long term financing, this year. EFIC has been asked to provide cover for Mozambique country risk.
The PRI product
Catering for increasing market demand, EFIC offers two types of Political Risk Insurance depending on whether the applicant is either an investor or lender. For investors, EFIC's PRI (Equity) facility can cover the insured in case political events cause a loss of investment or prevent the repatriation of capital or investment earnings. Lenders providing non-shareholder loans for overseas enterprises and projects are eligible for EFIC's PRI (Debt) facility, which provides cover in the event that political events prevent the servicing or repayment of debt.
Any entity carrying on business in Australia is eligible to apply for equity cover. However, EFIC does require that the action of undertaking an overseas investment is a normal activity for that entity. Any financial institution, acceptable to EFIC, is eligible for debt cover.
Depending on the individual needs of the client, EFIC can insure a project or investment against losses arising from:expropriation (eg nationalisation of the Foreign Enterprise by the overseas host government), war damage or political violence, and currency inconvertibility and exchange transfer blockage. EFIC may also include specific cover for breach of contract subject to appropriate arbitration procedures being set out in the contract.
EFIC has a flexible stance on the percentage of cover under its PRI policies. ?We will provide cover,? he says, ?based on the higher of either the value of the Australian investment or the level of goods and services provided.?
For the equity insurance product, cover can be for up to 100% of the aggregate of the amount invested, plus up to 100% for future growth in the investment. Policies are typically available for 10 years, but can be up to 15 years and are traditionally provided with up to 90% indemnity.
Regarding the debt product, EFIC can provide cover for an amount of principal (with the maximum being the amount of the loan) plus a component for interest. Policies are available for a term commensurate with those of the underlying loan agreement.. Debt-related policies can provide indemnity of up to 100%.
Environmental Policy
As environment-related regulations and pressures increase for both investors and lenders, EFIC has developed a comprehensive and rigorous framework for assessing the environmental impact of projects being considered for export finance or political risk insurance.
Where EFIC's screening process indicates that a project or investment has the potential to significantly impact the environment, EFIC encourages sponsors to adopt the World Bank Group's Pollution and Abatement Handbook when considering environmental impact and pollution control parameters.
Clarey says that EFIC has developed an environmental screening process to help the corporation better determine and assess the environmental impacts associated with potential transactions. EFIC's screening process recognises the broad range of environmental impacts that exports, projects and investments can have, as well as the differences between the types of exports that EFIC facilitates.
EFIC has therefore developed a tiering system under which each potential transaction is categorised A, B, or C. These categories have been developed following discussions with Australian exporters, various non-government organisations and environmental practitioners.
The risk categorisation approach is consistent with the World Bank Handbook, and the approach adopted by major multi-lateral financiers and insurers.
For the most serious, Category A project, (both the Sasol and Oxiana ventures are classified as such) the insurance applicant or sponsor is required to provide EFIC with a full report, normally an Environmental Impact Assessment undertaken with reference to the World Bank Handbook. All Category A projects are expected to invite local public comment in host countries as part of the EIA process, and include a mitigation or management plan.
Under EFIC's policy guidelines, Clarey says that environmental studies on projects for which EFIC's facilities have been requested are posted on the EFIC website and available for public commentary for a period of 45 days.
Clarey readily admits that EFIC is somewhat disadvantaged compared to its competitors because of its strict environmental policy. ?Not all PRI players yet have a strong environmental policy, particularly in the private market- which is not as demanding about environmental guidelines. Consequently, there are other organisations which can consider business which we cannot,? he explains.
But equally, EFIC's policy assists investors in maintaining a sound environmental profile at a time when environmental issues are an increasingly critical business consideration.
The future
The current, growing demand for political risk insurance is expected to continue for the foreseeable future. Continuing geo-political tensions and global macroeconomic uncertainty have prevented a rapid improvement in market conditions for new projects in sectors including natural resources.
In response to client needs, EFIC is continuing to develop and refine its PRI products. ?One frequent difficulty has been the issue of subrogation,? Clarey says. ?Investors often want to have their equity interest covered by PRI alongside political risk insurance on the project debt. But typically the equity investor has had to forgo PRI because of the requirement for subrogation and specific security on the part of the debt interests.? EFIC has, however, indicated its desire for flexibility on this issue and to provide equity with adequate PRI cover even where lenders are receiving most of the security.
With the project finance market consolidating alongside consolidation in the general banking market, Clarey says that EFIC's role as a project lender may become more important in the future.
?As the Manila North Tollways Corporation [MNTC] project in the Philippines demonstrated, we are quite prepared to fulfill a lending role, where Australian interests are well served in doing so.?
The brownfield, US$371 million Manila North Tollways Corporation (MNTC) transaction involves the reconstruction and widening of an existing road in the Philippine's, the North Luzon Expressway. EFIC has been an important element in the financing. The Australian institution is participating as co-financier with the Asian Development Bank and will provide a US$55 million direct term loan facility to MNTC.
EFIC expects steady growth in its medium and long term lending, insurance, and guarantees business. Testament to the corporation's critical role in supporting major capital exports and projects, new business written grew from A$235 million in the fiscal year ended 30 June 2000, to A$371 million in the fiscal year ended 30 June 2001 and increased to A$448 million in the fiscal year ended 30 June 2002.
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EFIC, a self-funded corporation wholly owned by the Australian Commonwealth Government, expects to play a major role in this growing market. Michael Clarey, Head of Structured Trade and Project Finance, points out that EFIC is something of a hybrid. ?We're a bit like a combination of US Eximbank and the US's Overseas Private Investment Corporation. We do everything from performance bonding to export financing and insuring overseas investment.? EFIC's main product lines are export finance loans and guarantees, political risk insurance, medium term payment insurance, export working capital guarantees, and performance bonds.
EFIC has built up considerable expertise and experience in the Asia Pacific and Southern African regions and the mining and natural resources industries and is well placed to support investors and lenders as demand for PRI increases. For more than 40 years, EFIC has been involved in supporting projects in many high-risk countries in both regions. Clarey notes that key staff members within the corporation also have decades of experience of project finance, some having held high-level positions at major global banking institutions and other export credit agencies.
As Australia's export credit agency, EFIC also has a comparative advantage in country risk assessment:
? EFIC has underwritten exports and investments in both emerging and mature markets.
? EFIC's information sources extend beyond traditional commercial sources and include other Export Credit Agencies worldwide, the IMF, the World Bank, and Australian diplomatic posts.
? EFIC can accept higher risk as it has experience in moderate- to high-risk markets and has the capacity to spread these risks over a larger portfolio.
EFIC's strengths are highlighted in the role that the corporation is playing in Australian mining company, Oxiana Resources' copper and gold project in the Sepon Project Development Area in southeastern Laos. According to Clarey, Sepon represents the first major international mining project in this geographic area for some time. Gold production is already underway at the mine and the project is expected to reach full gold production in the first quarter of 2003.
Clarey comments, ?although Oxiana's directors and managers felt that it was particularly appropriate to have PRI, EFIC was only appointed after a competitive process and proposal stage.? He adds, ?EFIC's appointment was partly in recognition of our strong position in this region and in the industry. Australia's good relations with Laos at the sovereign level were also viewed as a real positive.?
During the project, EFIC provided PRI cover both at the feasibility study stage and for the first phase investment aimed at developing the gold resources at Sepon. EFIC is keen to play a further role in the project by covering the second phase, which will see the extraction of Sepon's copper reserves and which is scheduled to begin at the end of this year.
EFIC now expects to see new natural resource projects and investment in the Asia-Pacific and Southern Africa in countries as diverse as Fiji, Papua New Guinea, and Mozambique. Even more expansive opportunities are forecast over the next few years in the region, in the oil and gas industries.
Due to political and economic difficulties, however, there has been limited activity recently in Indonesia, a country with some of Asia's richest natural resource deposits. Nevertheless the situation has improved markedly since the Asian crisis and Clarey notes that EFIC is interested in playing a part in new projects in the country, while remaining sensitive to the exact location of the project.
EFIC has also indicated its willingness to consider playing a part in the development of the Bayu-Undan field gas reserves in East Timor, Asia's newest nation. Plans to exploit the gas reserves have been delayed. ?But the various interested parties are increasingly active in discussing potential projects and we are very interested in being involved,? says Clarey.
In Southern Africa, EFIC is currently looking at providing PRI cover for the lenders to a natural gas project in Mozambique. The project involves the construction of a 865km long pipeline to transport natural gas from Temane in Mozambique to South African petrochemicals company, Sasol's, Secunda Plant in South Africa's Mpumalanga province. It is expected that the bridge facility to fund the development will be replaced with long term financing, this year. EFIC has been asked to provide cover for Mozambique country risk.
The PRI product
Catering for increasing market demand, EFIC offers two types of Political Risk Insurance depending on whether the applicant is either an investor or lender. For investors, EFIC's PRI (Equity) facility can cover the insured in case political events cause a loss of investment or prevent the repatriation of capital or investment earnings. Lenders providing non-shareholder loans for overseas enterprises and projects are eligible for EFIC's PRI (Debt) facility, which provides cover in the event that political events prevent the servicing or repayment of debt.
Any entity carrying on business in Australia is eligible to apply for equity cover. However, EFIC does require that the action of undertaking an overseas investment is a normal activity for that entity. Any financial institution, acceptable to EFIC, is eligible for debt cover.
Depending on the individual needs of the client, EFIC can insure a project or investment against losses arising from:expropriation (eg nationalisation of the Foreign Enterprise by the overseas host government), war damage or political violence, and currency inconvertibility and exchange transfer blockage. EFIC may also include specific cover for breach of contract subject to appropriate arbitration procedures being set out in the contract.
EFIC has a flexible stance on the percentage of cover under its PRI policies. ?We will provide cover,? he says, ?based on the higher of either the value of the Australian investment or the level of goods and services provided.?
For the equity insurance product, cover can be for up to 100% of the aggregate of the amount invested, plus up to 100% for future growth in the investment. Policies are typically available for 10 years, but can be up to 15 years and are traditionally provided with up to 90% indemnity.
Regarding the debt product, EFIC can provide cover for an amount of principal (with the maximum being the amount of the loan) plus a component for interest. Policies are available for a term commensurate with those of the underlying loan agreement.. Debt-related policies can provide indemnity of up to 100%.
Environmental Policy
As environment-related regulations and pressures increase for both investors and lenders, EFIC has developed a comprehensive and rigorous framework for assessing the environmental impact of projects being considered for export finance or political risk insurance.
Where EFIC's screening process indicates that a project or investment has the potential to significantly impact the environment, EFIC encourages sponsors to adopt the World Bank Group's Pollution and Abatement Handbook when considering environmental impact and pollution control parameters.
Clarey says that EFIC has developed an environmental screening process to help the corporation better determine and assess the environmental impacts associated with potential transactions. EFIC's screening process recognises the broad range of environmental impacts that exports, projects and investments can have, as well as the differences between the types of exports that EFIC facilitates.
EFIC has therefore developed a tiering system under which each potential transaction is categorised A, B, or C. These categories have been developed following discussions with Australian exporters, various non-government organisations and environmental practitioners.
The risk categorisation approach is consistent with the World Bank Handbook, and the approach adopted by major multi-lateral financiers and insurers.
For the most serious, Category A project, (both the Sasol and Oxiana ventures are classified as such) the insurance applicant or sponsor is required to provide EFIC with a full report, normally an Environmental Impact Assessment undertaken with reference to the World Bank Handbook. All Category A projects are expected to invite local public comment in host countries as part of the EIA process, and include a mitigation or management plan.
Under EFIC's policy guidelines, Clarey says that environmental studies on projects for which EFIC's facilities have been requested are posted on the EFIC website and available for public commentary for a period of 45 days.
Clarey readily admits that EFIC is somewhat disadvantaged compared to its competitors because of its strict environmental policy. ?Not all PRI players yet have a strong environmental policy, particularly in the private market- which is not as demanding about environmental guidelines. Consequently, there are other organisations which can consider business which we cannot,? he explains.
But equally, EFIC's policy assists investors in maintaining a sound environmental profile at a time when environmental issues are an increasingly critical business consideration.
The future
The current, growing demand for political risk insurance is expected to continue for the foreseeable future. Continuing geo-political tensions and global macroeconomic uncertainty have prevented a rapid improvement in market conditions for new projects in sectors including natural resources.
In response to client needs, EFIC is continuing to develop and refine its PRI products. ?One frequent difficulty has been the issue of subrogation,? Clarey says. ?Investors often want to have their equity interest covered by PRI alongside political risk insurance on the project debt. But typically the equity investor has had to forgo PRI because of the requirement for subrogation and specific security on the part of the debt interests.? EFIC has, however, indicated its desire for flexibility on this issue and to provide equity with adequate PRI cover even where lenders are receiving most of the security.
With the project finance market consolidating alongside consolidation in the general banking market, Clarey says that EFIC's role as a project lender may become more important in the future.
?As the Manila North Tollways Corporation [MNTC] project in the Philippines demonstrated, we are quite prepared to fulfill a lending role, where Australian interests are well served in doing so.?
The brownfield, US$371 million Manila North Tollways Corporation (MNTC) transaction involves the reconstruction and widening of an existing road in the Philippine's, the North Luzon Expressway. EFIC has been an important element in the financing. The Australian institution is participating as co-financier with the Asian Development Bank and will provide a US$55 million direct term loan facility to MNTC.
EFIC expects steady growth in its medium and long term lending, insurance, and guarantees business. Testament to the corporation's critical role in supporting major capital exports and projects, new business written grew from A$235 million in the fiscal year ended 30 June 2000, to A$371 million in the fiscal year ended 30 June 2001 and increased to A$448 million in the fiscal year ended 30 June 2002.
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