December 2021: Tinubu Square Thought Piece

A panel of international experts discussed the vital role Export Credit Agencies play in supporting trade and development, and how they must transform in response to evolving complexities.

Facilitated by Jérôme Pezé, CEO of Tinubu Square, the discussion drew on the experience of the following panellists:

Diana Smallridge; President and Founder of International Financial Consulting, and an expert on Export Credit Agencies, EXIM Banks, and Development Banks
Michel El-Khoury; Lead Consulting Partner for Deloitte Canada’s Government Financial Services practice, with consulting experience across strategy, innovation, operations, and technology
Henri d’Ambrières; Independent Adviser on export, trade and project finance, and former Global Head of Export Finance at Crédit Agricole

In Brief:

The role of the ECAs is expanding, with success metrics focused on all stakeholders, not just increased business.
ECAs must operate as customer centric organizations, redeveloping solutions to support a broader business community, and partnering for greater impact.
ECAs need to consider their responsibilities in relation to climate change, and plan for the associated risks.
Broader collaboration will bring solutions for finance and infrastructure gaps
For successful organizational change, ECAs must consider more than digital transformation, with shifts in internal culture a key factor for success.

The ECA Mandate

While it is widely recognized that an effective ECA brings significant support to an economy, business communities around the world continue to put pressure on ECAs for an extension of their’ traditional roles.

ECAs emerged over 100 years ago, with the UK’s Export Credits Guarantee Department (now UK Export Finance - UKEF) launching in 1919. Now, almost all OECD countries and emerging markets have some form of ECA. Their traditional role focuses on trade and investment promotion, supporting national companies to sell and invest abroad, assuming the political and commercial risk of non-payment.

“Does the ECA have a role beyond what they have traditionally played? What is it that our customer truly needs and where does the problem lie?” - Michel El-Khoury.

Established ECAs are looking at transformation by rethinking business problems and focusing on customer centricity. Some are creating new offerings, such as in Canada with the introduction of knowledge services that go beyond traditional financing.

“If you want to support exporters, you have to support them from the beginning and be proactive, without waiting for solicitation as it occurred in the past. Transform internally and digitally” – Henri d’Ambrières.

ECAs are supporting a myriad of stakeholders, which creates unique challenges. They have to consider the needs of exporters, government policies, taxpayers, and also the capacities of private sector credit insurers, banks and other players.

“Success doesn’t just mean increasing business. Success means broadening the pie for everybody and that may mean shrinking some of your own activities. To be single-minded towards growth and profitability is a risky prospect” – Diana Smallridge.

How can ECAs partner for greater impact?

As awareness from ECAs grows there will be an increase in partnerships, with application that is broader than just products. Michel El-Khoury categorizes the potential for partnerships into three types:

1. Partnering for business development, to attract more customers to their portfolio. This could be with other government agencies that have economic development mandates, particularly in economies where credit insurance is under penetrated. These partnerships aim to go where the customer is, and are translating into e-commerce platforms, banking platforms and transportation platforms.

2. Partnering for capability. Instead of ECAs performing the end-to-end workflow internally, they could rely on partner organizations who may be more effective and efficient at parts of the process. For example, partnering for due diligence in underwriting in the context of Know Your Customer and financial crime. This also occurs in areas such as working capital loans where ECAs secure underwriting support from associations that truly understand the risks associated with a particular sector, such as fintech.

3. Partnering for products and solutions, such as with financial institutions that have the distribution and digital capability that many ECAs do not have.

“If you create a value proposition that is win-win-win, not only for ECAs but also for the financial institutions and ultimately the end customers, that creates real traction as all stakeholders in the ecosystem are winning.” – Michel El-Khoury.

Shifting towards short-term credit insurance

Many ECAs are under pressure to find solutions to support their’ SMES. While most initially started out offering short-term cover, over time the focus moved to medium and long-term cover, which in most cases is limited to large corporates.

In the event of a crisis such as Covid-19 or the GFC, the private sector’s appetite shrinks so ECAs need to step in and identify market gaps. However, SMEs are under-served regardless of whether it’s a crisis or a regular business cycle and attract less interest from other market players because of their size and potential revenues.

European Union regulation prevents ECAs from dealing with short-term credit insurance among developed OECD countries. This rule may have been over interpreted, with some ECAs such as those in the UK and France leaving the short-term business altogether. Interestingly, since Brexit, the British Exporters Association has called for UKEF to reintroduce short-term credit insurance. In Germany they believe it makes sense to offer short-term credit insurance in developing countries, so they continue to offer it.

In 2020 due to the Covid-19 crisis, the European Union recognized the problems many companies were facing and brought in temporary support for short-term credit insurance. As the crisis disappears, so too will the need for public short-term solutions within Europe. However, it makes sense to continue to offer it in emerging markets where regulation does not prevent it. “Those ECAs that have the mandate of supporting whatever market gap exists are going to need to find solutions to serve those SMEs. Not just the product focus of short-term credit insurance, but also - what do they need to be able to be successful in the export market? Access to working capital, pre-shipment finance, bonding – all instruments that an ECA needs to have in its toolkit, ready to deploy at any time, in the event of a crisis or just general market conditions for SMEs where the private sector doesn’t have an appetite” – Diana Smallridge.

Do ECAs have a responsibility to meet sustainable development goals?

Ultimately for ECAs their first mandate is and always will be to support exporters. Many now also have to consider Sustainable Development Goals (SDGs), climate change and other broader government decisions.

UKEF has committed to no longer supporting fossil fuels and have a net zero commitment, which was a clear mandate from their government. In some countries ECAs are considering these bigger questions without direct guidance. With a new layer of responsibility on top of the traditional ECA role, some may now have to decline a classic exporter who they had supported for years.

ECAs have accountabilities to their state and stakeholders. So, who decides what the priorities are?

“Sustainable projects might compete with climate change. In Europe, climate change, which is under SDG 13, might be the priority, whereas in a recipient country the priority might be other SDGs. We have to consider this.” – Henri d’Ambrières.

Should ECAs plan for climate change impacts?

With the establishment of the taskforce on climate related financial disclosures (TCFD), ECAs need to consider the risks facing their’ portfolios both in terms of physical risk and transitional risks.

Should they wait for their government to direct them on whether to stay in the fossil fuel sector? If they transition away from oil and gas, will they have stranded assets?

“It’s around business model thinking, from origination through to underwriting, risk management, even at the strategy level and of course thinking about products and metrics, accounting for those risks. As a government owned financial institution, it’s important to show leadership as countries around the world embrace these principles.” – Diana Smallridge

Closing the funding gaps

With banks finding it more difficult to fund long term projects, along with global liquidity, some creditors may be interested in funding buyers’ credits. We are seeing broader access to different types of capital, with institutional investor solutions developing beyond the classic commercial bank as the underlying lender. As ECAs increasingly seek additional sources of funding, they will need to look to investors as part of the solution.

Looking at the clean infrastructure gap and the move towards climate smart solutions, there is an increasing opportunity for ECAs to collaborate with development banks for large infrastructure deals. The concept of “billions to trillions” brings the need and dependency not just from public finances but also catalysing public sources of capital, institutional investors, etc.

“According to the International Finance Corporation, the funding gap of investment for SDGs is $2.5 trillion a year. With development banks and official development assistance unable to close this gap alone as their new yearly commitments stand below $1 trillion, ECAs can contribute and will have to work together if we want to reach the SDGs” – Henri D’Ambrières.

Transformation success factors

While digitalization of ECAs is occurring at a rapid pace, many struggle with successful transformation.

Deloitte research indicates that while the right technology is important, it is not the biggest challenge that organizations face. The most important factor for success is culture and people. The research found that a lack of experimentation was as a key challenge. Other significant reasons why organizations struggle with transformation include managing ambiguity, decision making, transparency, fluidity in structure, and workforce challenges.

“The ability to be agile and nimble enough to change as the circumstances around you are changing is a particularly important skillset and something that ECAs will have to deal with. Just telling people to be more agile and more innovative doesn’t work. Hiring or buying digital skills alone is not going to be sufficient. Training or upskilling your existing people is one of the keys to success.” – Michel El-Khoury

80% of organizations acknowledge the need for change, but less than half believe they are on the right track to achieve it. El-Khoury suggests that ECAs should first establish the key drivers for their organization to transform and anchor their transformation on them. In addition, identify the key challenges that are most likely to hinder success and try to solve those first.

Summary

The ECA is widely recognised as an important infrastructure for economic development and competition. With a constantly changing trade and investment landscape, evolving environmental and political priorities and technological advancement, ECAs around the world are under growing pressure to keep up and adapt.

While discussion around role and mandate is expanding, ECAs must not lose their focus of supporting national exporters, and develop solutions based on new thinking and agility for greater impact.

Copyright © 2020 Credit Insurance News. All rights reserved.
All news stories on Credit Insurance News' website are included with the prior permission of the copyright holder. Reproduction or redistribution in whole or in part, in any manner, without the express prior written consent of the copyright holder, is a violation of copyright law. If you, or your organisation wish to redistribute, republish or link-to all or any part of any Credit Insurance News Digest, you must first contact the copyright holder direct or email sally.brown@creditinsurancenews.co.uk for further information.